Case Study: Cost Segregation Analysis for an Office Building in Columbia, Tennessee

Narrative

In 2019, the owners of a single-story office building in Columbia, Tennessee, sought to optimize their tax position through strategic cost segregation analysis. The property consists of a 6,000 square foot commercial office space constructed in 2019. The building features modern amenities and systems designed to provide an efficient and comfortable working environment.

The structure incorporates various building components including specialized electrical systems, HVAC equipment, and interior fixtures. The property also includes significant site improvements such as parking areas, sidewalks, and landscaping. The owners engaged Engineered Tax Services (ETS) to conduct a comprehensive cost segregation study to identify opportunities for accelerated depreciation.

Objective

The primary goal was to identify and reclassify eligible building components into shorter depreciation life categories, thereby maximizing tax benefits through accelerated depreciation. This analysis aimed to improve cash flow and provide both immediate and long-term financial advantages for the property owners.

Methodology

ETS employed a detailed, engineering-based approach, which included:

1. Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
2. Document Review: examining architectural plans, construction documents and accounting records
3. Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
4. Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)

Asset Allocation

5-Year Class Life

Total Allocation: $55,677.64 Percentage: 8.39%

• Electronic detection and alarm systems
• Specialized electrical components
• Office equipment connections
• Break room fixtures and equipment
• Dedicated electrical systems

15-Year Class Life

Total Allocation: $152,711.71 Percentage: 23.01%

• Site utilities
• Landscaping
• Paving and parking areas
• Sidewalks
• Exterior lighting

39-Year Class Life

Total Allocation: $455,305.65 Percentage: 68.6%

• Basic building structure
• Standard electrical
• Plumbing systems
• HVAC
• Interior walls and finishes

Class Life Details:

Summary

The cost segregation study for this Columbia office building resulted in significant tax benefits through the reclassification of assets into accelerated depreciation categories. The analysis identified that 31.4% of the total depreciable basis could be moved from the standard 39-year depreciation to shorter recovery periods of 5 and 15 years.

Through 2024, the study generated accumulated depreciation of $277,949.92, compared to $101,397.84 without cost segregation – an increase of $176,552.08 in accumulated depreciation. This acceleration of depreciation provided substantial immediate tax savings and improved cash flow for the property owners, while maintaining full compliance with IRS guidelines and requirements.