Can a Cost Segregation Study Lower Your Tax Bill?

Like most business owners, you are probably looking for ways to reduce your tax bill – especially with the highest federal tax bracket rate now at 39.6 percent. If you own real estate or have paid for a build-out on a property you are leasing, you need to make sure that you are taking advantage of the most beneficial rules surrounding depreciation of your fixed assets for tax purposes.

Restaurant buildings and leasehold improvements have a life of 15 or 39 years depending on when they were placed in service. However, with a cost segregation study, you can analyze the building construction and leasehold improvements for the purpose of depreciating certain portions of the construction costs over a much shorter life.

Below is a list of a few assets that could be taken from a 15 or 39 year life and instead allocated to a five-year life for a restaurant. Without a proper study, taxpayers are unable to properly break these costs out of a building or leasehold improvement asset and have them stand up to an IRS audit. Here are a few examples:
  • Decorative millwork (crown molding, chair railing)
  • Decorative light fixtures
  • Electrical – cost specific to restaurant equipment and decorative fixtures
  • Fire suppression systems in kitchen hoods
  • Kitchen equipment hook-ups (electrical and plumbing) and dedicated kitchen HVAC
  • Signage
A cost segregation study can be performed on any assets placed in service since 1987. Even if you placed your assets in service in a year prior to the current tax year, you can still capture the advantages of a cost segregation study by calculating a “catch-up” adjustment. The catch-up adjustment is a cumulative expense calculated as the depreciation that should have been taken in prior years if a study would have been performed in the year the assets were placed in service, less the depreciation that was actually taken in prior years. The catch-up is allowed as a deduction on a current year tax filing.

If you have not taken advantage of a cost segregation study, it is good to know that it is not too late to capture the benefit. There is a good chance that there are additional deductions you are able to take now.