Many manufacturers who own or lease their property are not taking full advantage of tax savings available through a method that allows them to more quickly depreciate assets for cost savings. Cost segregation is an IRS-approved tool that allows for the separation of building components so that items such as land improvements and personal property can be separately depreciated over shorter recovery periods for tax reporting purposes. Identifying assets and determining which costs qualify for accelerated depreciation can be a significant tax-reduction tool for owners of manufacturing businesses.
Generally, a property’s structure is subject to a 39-year recovery period for nonresidential periods and 27.5-year for residential, while land improvements qualify for a 15-year recovery period and personal property qualifies for a five-year recovery period. However, cost segregation can allow affected assets to be depreciated on a five-, seven- or 15-year schedule.
Manufacturing Facilities Do Apply
When it comes to what qualifies for cost segregation, there is a common misconception about real estate that does not have a substantial amount of personal property associated with it, such as in the case of manufacturing facilities and warehouses. However, there can still be significant tax benefits because these properties often have significant land improvements, which have a much shorter class life than the building or structure. Additionally, there may be portions of plumbing, electrical, and mechanical that can also qualify for shorter class lives. To maximize tax savings, your building must have been purchased, constructed, or renovated after 1987. However, there are still opportunities for older buildings, and a cost segregation study can identify all opportunities for tax savings.
Cost Segregation Study
A cost segregation study by an experienced engineer identifies which of your assets qualify for quicker depreciation. A qualified engineer will review blueprints, electrical configurations, and construction plans to determine which structural and mechanical assets can be categorized as personal property. Non-structural assets can include costs for:
- Parts of an electrical system
- Carpeting and flooring
- Parking lots and sidewalks
- Electrical wiring for machinery
- Gas lines to power machinery
The value of the cost segregation study is in savings achieved through the accelerated depreciation.
Tax Reform Ups the Ante
The Tax Cuts and Jobs Act (TCJA) of 2017 enhanced the benefits of cost segregation with changes to bonus depreciation. Established as a stimulus measure in 2001, bonus depreciation allows taxpayers to deduct a certain percentage of their assets costs in the first year they are placed in service. The TCJA increased bonus depreciation from 50 percent to 100 percent for assets acquired after Sept. 27, 2017 through the tax year 2022.
Don’t risk leaving money on the table that could be put to good use expanding your manufacturing business. A cost segregation study is your key to increasing cash flow, reducing your tax liability and deferring taxes. Goldin Peiser & Peiser’s Cost Segregation Services Team can help your manufacturing business with a property analysis, cost segregations study, and recommendations.
For more information about a cost segregation study for your manufacturing business or other questions about our Manufacturing and Distribution Services Group, please contact Kevin Harris at 214-635-2473.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.