Cost Segregation Studies: How They Work and Why You Need One

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Cost segregation is a tax-saving strategy that can help businesses accelerate depreciation schedules and reduce their tax liability. By segregating costs into different asset categories, businesses can take advantage of higher depreciation rates for certain assets.

Benefits of Cost Segregation

There are a number of benefits to cost segregation, including:

Reduced taxes: By accelerating depreciation schedules, businesses can reduce their taxable income and save on taxes.
Increased cash flow: Depreciation is a non-cash expense, so by accelerating depreciation, businesses can increase their cash flow.
Improved financial statements: Cost segregation can help businesses improve the presentation of their financial statements by providing a more accurate picture of their assets.
How Cost Segregation Works

Cost segregation is a complex process that should be performed by a qualified professional. A cost segregation study will typically involve reviewing a business's assets and segregating them into different categories. Once the assets have been segregated, the appropriate depreciation rates can be applied.

Working with a Cost Segregation Consultant

It is important to work with a qualified cost segregation consultant to ensure that your study is accurate and compliant with all applicable tax laws. A cost segregation consultant can help you identify which assets are eligible for cost segregation and can help you prepare the necessary documentation.

Representative Examples of Cost Segregation Studies

The following are some representative examples of cost segregation studies:

A manufacturing company that segregates the costs of its machinery and equipment into different categories, such as building components, machinery, and equipment.
A retail company that segregates the costs of its store fixtures and furnishings into different categories, such as shelving, counters, and display cases.
A restaurant that segregates the costs of its kitchen equipment and furniture into different categories, such as ovens, stoves, and tables.
Conclusion

Cost segregation is a tax-saving strategy that can help businesses reduce their tax liability and improve their cash flow. By working with a qualified cost segregation consultant, businesses can ensure that their study is accurate and compliant with all applicable tax laws.

In addition to the above, it is important to note that cost segregation is not a one-time event. Businesses should review their assets on a regular basis to ensure that they are being depreciated correctly.

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