I will be doing several significant improvements to a commercial buildings and have been considering cost segregation. A colleague informed me that I should also consider incorporating construction tax planning. Can someone please help me understand the difference between cost segregation and construction tax planning?
Posted on TaxConnections
There are notable differences and benefits between Cost Segregation and Construction Tax Planning.
The below synopsis will serve as an overview of the scope, application, and synergies between the two service offerings to better understand how they can positively impact expenditures for renovating your commercial building.
A Cost Segregation analysis will review property, plant, and equipment to properly classify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 or 39 years) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, 7 or 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site visits are conducted to review the building envelope as part of a Cost Segregation analysis to ensure sustainable assessments for tax return fling positions.
In contrast, Construction Tax Planning uses a proactive pre-design approach to identify additional tax benefits related to new and planned construction projects. Construction Tax Planning should be performed on all new buildings, adding new wing to an existing building, or merely renovating a single floor within an existing building in order to maximize the tax benefits opportunities.
Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in construction to ensure that the structural components will be classified as personal property as opposed to real property (e.g., use of a modular wall as opposed to permanently affixing a wall to bifurcate office and/or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property as opposed to real property).
In addition, Form 3115 is never filed since Construction Tax Planning is proactive and not reactive. Noting, there is no need to reclassify assets as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk as an accounting method change never occurred and therefore Form 3115 is not filed. Accounting method changes only occur when a transaction is treated a certain way on a tax return (i.e., regardless of correctly or incorrectly) for a period of two years or more.
Finally, by combining a Cost Segregation analysis with both the principles of Construction Tax Planning, Bonus Depreciation, and Disposition Deductions (disposition of the remaining value of structural components within the building envelope) you will maximize the benefits for renovating your commercial building.