The Benefits of Cost Segregation
How Cost Segregation Services Can Benefit Your Company
The benefits of cost segregation, resulting from a deferral of tax payment and accelerated depreciation, are easy to demonstrate. For each million dollars that is reclassified into a 5-year class life, the taxpayer realizes from $289,000 to $299,000 in additional cash flow over the first five years. Similarly, for each million dollars that is reclassified into a 15-year class life, the taxpayer realizes from $90,000 to $230,000 in additional cash flow over the first five years. (These are approximations and the exact amounts depend on factors such as the tax rate and whether the subject property qualifies for bonus depreciation.)
A Case Study
A $10,000,000 office building was placed in service in the year 2000. It does not qualify for bonus depreciation (see "Bonus Depreciation" below). It has a tax rate of 40% and a discount rate of 8%. If 10% of the building is reclassified into a 5-year class life, 1% into 7-year, and 10% into 15-year, the cumulative present value of taxes deferred is over $367,000 using the half-year convention.
It is important to note that this is only an example and the actual percentages of reclassified property will vary greatly depending upon many factors such as the use of the building, the quality of finish out as well as tax and discount rates.