United States: Boost your cash flow with a capital or cost segregation study
To print this article, all you need to do is be registered or log in to Mondaq.com.
If you’re looking for opportunities to improve your company’s cash flow, consider a capital asset or cost separation study. Manufacturing is a capital-intensive industry, so ensuring fixed assets are properly classified is key to recovering their costs as quickly as possible.
FIXED ASSETS STUDY
A fixed asset survey examines all depreciable assets – including real estate, equipment, machinery, fixtures and furnishings – to determine if you have misclassified any assets. Properly classifying assets into a category with a shorter depreciation life will speed up capital cost allowances, potentially reducing taxes and increasing cash flow.
These studies are not just for the most recent tax year. A capital study can also create an opportunity to claim refunds for capital cost allowances missed in previous years.
COST SEGREGATION STUDY
A cost segregation study is a type of capital study that focuses on the costs of buying, constructing, or substantially improving a building or other real estate. Generally, commercial real estate (other than land) is depreciable over 39 years, while residential real estate is depreciable over 27½ years. A cost segregation study identifies assets that could be treated as building components, but are properly classified as personal property depreciable over five or seven years or land improvements depreciable over 15 years.
Related Reading: Cost Segregation Study is a Way to Increase Cash Flow
The following are examples of building components that may be eligible for accelerated depreciation:
- Costs of reinforced foundations;
- Specialized electrical, plumbing, cooling or ventilation systems; and
- Other structural components required by the manufacturing process rather than by the operation of the building.
By allocating a portion of construction costs to these shorter-lived assets, you can accelerate capital cost allowances and significantly reduce your tax bill. It may even be possible to write off the full cost of these assets in the first year under bonus depreciation or the expense rules of Section 179.
Related Reading: Why Wait to Deduct Your Purchases? Turbocharge tax deductions with bonus depreciation and Sec. 179
THE TIME HAS COME
During the COVID-19 pandemic, many manufacturers reconfigured their factories or offices, or otherwise made improvements to their buildings to comply with new health requirements. Now may be the perfect time to conduct a capital or cost segregation study to maximize the tax benefits associated with these investments.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
POPULAR ARTICLES ON: US Wealth Management