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Over the past years, Drs. Hill & Thomas Co. has engaged WDW to prepare various tax returns as well as perform financial statement and benefit plan audits.

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PATTY BITTEL, Controller, Drs. Hill & Thomas Co.

Tax Savings Through Cost Segregation

Tony Jelenic CPATony Jelenic, CPA

A very important tax break is available for owners of commercial real estate. This tax break is called "cost segregation." The tax savings can be very substantial and realized immediately.

Most owners of commercial 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, depending on the date of acquisition. Additionally, the Emergency Economic Stabilization Act of 2008 provides a shorter depreciation period for certain buildings.  A significant portion of a building's cost can be depreciated over much shorter periods, usually five or seven years under IRS cost segregation guidelines.

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. In addition, these depreciation deductions are computed using an accelerated depreciation method (the "200 percent declining balance method") which allows costs to be recovered at twice the rate that applies to the "straight-line" method.

Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. It would be impossible to list them all, but common examples include molding, millwork and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, specialized machinery and equipment and the costs of plumbing and electrical components allocable to such equipment. In addition, certain land improvements located outside of the building may be depreciated over 15 years. Land improvements include items such as landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts and playgrounds. Depending upon the type of building, you can expect to deduct between 10 and 60 percent of its cost over the shorter recovery period.

If you would like more information on cost segregation or if you feel you may benefit from a cost segregation analysis, please contact our offices at your convenience so that we may discuss this in greater detail.