A cost segregation study determines the percentage of building materials that can be depreciated over a shorter period of time. This is generally done by evaluating how long an asset will last, what its intended use is, and how often it will be used. If you have ever wondered why your accountant recommends doing this type of analysis when preparing your tax return then keep reading!
What is a Cost Segregation Study?
A cost segregation study identifies and segregates the costs of tangible personal property into specific assets, resulting in faster depreciation deductions. In other words, it helps you get more money back by accelerating your tax deductions and identifying potential write-offs that may not have been realized before.
Who should perform a cost segregation study?
Any company that owns depreciable assets should consider a cost segregation study. This includes:
- Small businesses
- Large businesses
- Businesses with a large number of assets
- Businesses that have recently purchased new assets or renovated their existing ones
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What’s the benefit of cost segregation?
Cost segregation is beneficial for a number of reasons, including:
- Tax benefits - Cost segregation can help you get an immediate tax break by shifting the depreciable expenses from personal property to buildings and land. This can be especially helpful if you're looking to sell your business or property in the near future, as it can increase their value.
- Increased cash flow - Cost segregation allows you to take advantage of accelerated depreciation methods for several years on buildings, machinery and equipment that might normally be considered personal property under IRS rules; this means more money in your pocket each month as income is generated from these assets sooner than usual.
- Increase in value of business & property - By moving high-revenue generating items into a building that has higher depreciation rates (property), you will make a larger impact on increasing the overall value of both real estate investments as well as business operations.
How Do I Perform a Cost Segregation Study?
There are two types of cost segregation studies: manual and automated.
- Manual studies require an appraiser who physically inspects each item in your property; they're more expensive but also more thorough because they involve inspecting every component in detail rather than just performing calculations based on historical data.
- Automated studies look at historical records such as maintenance logs or invoices to determine whether each component should be treated as depreciable or non-depreciable when calculating taxes. Automated studies are generally cheaper but less accurate than manual ones because they don't always include all relevant information about each item in your property.
Club Capital is the largest accounting and advisory firm for insurance agency owners in the country providing a one-stop financial infrastructure including monthly accounting, integrated payroll, CFO services, and tax preparation.
Cost segregation is an important process for every business owner, and it should be taken seriously. It can save you money on taxes and help grow your business by providing more capital for investment. It’s also a great way of keeping track of all the assets in your company.
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