A Business Owner’s Introduction to Cost Segregation Studies

The first few years of business can be the most challenging — money is typically tight, you’re just getting the word out, and you’re up against competition that has likely been in the market for a while now. In fact, research shows that less than 80% of small businesses make it longer than a year, with 29% of businesses failing because they ran out of cash. 

So, what’s the solution? Cost Segregation. 

When cash flow is slow, many businesses look to Cost Segregation Studies as a solution to their problem since it results in tax savings and more financial leniency. This way, if you need to increase focus on marketing or other business initiatives to generate more sales and revenue, you can. Here’s what you need to know to take advantage.

What Are Cost Segregation Studies?

KBKG defines Cost Segregation as a “strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.”

A cost segregation study refers to the process of splitting elements of a property into categories for tax reporting purposes. Essentially, the study accelerates depreciation so that the owner can take out a higher tax deduction immediately. 

Although it does not have to happen in the same year as the purchase occurs, you do have to have a cost segregation professional come to the property to conduct the study. From there, the process can include:

  • An analysis of what your potential benefits might be.
  • Gather all the necessary documents (i.e., appraisal, condition report, etc.).
  • Conclude with property examinations and a full report on the results and asset classifications.

Benefits of a Cost Segregation Study for Small Business Owners

There are many challenges to being a small business owner versus medium to large business owners. However, Cost Segregation Studies can be great for alleviating some of the financial burdens that may be holding you back from reaching your full potential and scaling in the future. 

Additional benefits include the various properties that can be studied, potential benefits based on depreciable aspects, and additional saving opportunities that can make all the difference for your small business. 

Can be used for a variety of properties

First and foremost, cost segregation studies can be used for various building types, from apartments and assisted living to restraints, retail, and warehouse properties. 

Common properties include:

  1. New construction
  2. Building purchases
  3. Remodels
  4. Additions to an existing property
  5. Tenant finish-outs

Benefits vary based on depreciable aspects of the property

While stating the benefits of conducting a study on all your depreciable aspects of the property, it’s important also to note that you cannot depreciate property features like the land itself and personal property. On the other hand, you can depreciate property such as:

  • Vehicles
  • Machinery
  • Office buildings
  • Buildings you rent out

When you do, you can yield huge tax savings over a period of time. The benefit of cost segregation comes from short-life property, and other expenses immediately tapped into. 

Can uncover other savings opportunities

Another savings opportunity that you may not have been aware of comes from Section 179D Energy Efficiency Commercial Building Deduction. The tax deduction allows taxpayers to receive up to $1.80 per square foot for remodeling or construction projects after 2021. 

The requirement is that particular energy efficiency standards are met to obtain the deduction, including new or existing buildings with installed interior lighting, building envelope, or “heating, cooling, ventilation, or hot water systems that reduce the energy and power cost of the interior lighting, HVAC, and service hot water systems by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1.”

Although most industries can benefit from the 179D tax deduction, the ones that would benefit the most include health care, real estate, retail, and manufacturing. 

Reduce the costs of expensive equipment 

One of the most stressful parts about being a small business owner is battling the many expensive upfront costs of equipment. While the depth of these costs can vary from industry to industry, every owner knows there is no shortage of equipment required to get the job done and impact your bottom line. Cost Segregation studies allow you to reduce the overall costs when you allocate your tax savings to outstanding leases and loan principles. 

According to Small Business Chron, “By increasing the deductions taken during the first few years of business, you will reduce your company’s overall tax debt and have more money to channel toward marketing, company development, and additional equipment purchases. More money available for marketing and expansion during a company’s early years can increase its chances of succeeding in its market.”

An early advantage in your industry means more potential to scale your company and increase cash flow in the years following your short-term savings from Cost Segregation Studies. Since each year your business makes it in the industry marks an increase in your odds for success, this can be significant. In fact, Investopedia reports that your chances for survival jump to 55% after the five-year mark.

Discuss Your Options with McMill CPAs & Advisors

If you’re considering your options after a long year and tight cash flow, cost segregation studies may be the answer you’ve been looking for. The extra money you can get back immediately in taxes from your investments can make a substantial difference in areas of your small business. McMill CPAs & Advisors has helped many small business owners in Norfolk, NE reach their business goals with Cost Segregation.

Contact us to learn more about Cost Segregation Studies and what we can do for you and your company. We understand that every business is different, so we will ensure that you are only matched with solutions best suited to your business needs in particular.