A tax deduction today is worth more than a tax deduction next year, and worth a lot more than a tax deduction 40 years from now. Cost segregation operates on the same principal. A cost segregation study may allow your to defer taxes to a later tax period by decreasing your income. This creates a financial gain due to the time value of money related to the tax deferred.

Cost Segregation studies performed by Doeren Mayhew’s Special Projects Group help you generate significant cash-flow savings from your property.

Time Value of Money

Most owners of residential rental property depreciate the entire cost of their building over 27.5 years. Owners of other types of buildings, such as offices, retail space, grocery stores, restaurants, warehouses, and manufacturing plants often depreciate the entire cost using a 39-year or 31.5-year depreciation period. Under IRS cost segregation guidelines, a significant portion of a building's cost can be depreciated over much shorter periods; usually 5, 7, or 15 years.

The cost segregation rules are complicated, but in brief, they allow a taxpayer to separately depreciate components of a building that are unrelated to its "operation and maintenance" over the shortened depreciation periods. Additionally, these depreciation deductions are computed using an accelerated depreciation method that allows costs to be recovered at twice the rate that applies under the "straight-line" method.

Qualifying Properties

Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. Following are some of the most common examples:

Molding, millwork, and other decorative elements
Wall coverings, partitions, window treatments, counters, cabinets, shelving, and special lighting
Specialized machinery and equipment (such as kitchen equipment) and the costs of plumbing and electrical allocable to such equipment

In addition, certain land improvements located outside of a building may be depreciated over 15 years. Land improvements may include items such as landscaping, fencing, sidewalks, curbs, parking lots, lighting, utilities, signage, swimming pools, tennis courts, and playgrounds.

Depending upon the type of building, you could expect to deduct between 10 and 60 percent of its cost over the shortened recovery periods.

Other Benefits

While the primary benefit is significantly improved cash flow, cost segregation may also allow for: