Source: KBKG, Inc.

All buildings contain components and fixtures necessary for taxpayers to run their businesses.  These items are not necessary for the ordinary operation and maintenance of a building and should not be considered “structural components”of the building.  Instead, they are defined as “tangible personal property” or “land improvements.”  Even though the IRS did not allow component depreciation under MACRS, the Tax Court ruled that items in a building that qualify as tangible personal property under the former ITC rules may be separately depreciated under MACRS as personal property

 (Hospital Corp. of America, 109 TC 21, Dec 52,163).

Here is an example. A taxpayer constructs an apartment building for $2.1 million and places it in service in the same year. The client’s CPA identifies that $100,000 is for furniture and equipment such as stoves, dishwashers, and other appliances. The remaining $2 million of project costs are treated as 27.5-year property until a cost segregation study is performed. The cost segregation specialist finds that an additional 16 percent of the construction-related costs should have been reclassified to a five-year life and 9 percent of the cost to a 15-year life.  Further, assume a combined 41 percent federal and state tax rate.

The following graphic shows how the depreciation deductions would compare in the first five years with a cost segregation study and without one. 

This summary is based on an article by Gian Pazzia, director of cost segregation services at KBKG, Inc., a national cost segregation consulting firm. You can reach him at 626-449-4225  extension150 or gian@kbkg.com.  For the complete article, click here. For more information about cost segregation, please visit www.costsegregation.biz .