While cost segregation has never been more efficient in saving business owners on federal income taxes, there are still many misconceptions when it comes to what property can and cannot be included in cost segregation. While most property can be broken down into categories of five, seven, and 15-year depreciation, not all types of property can be used to reduce taxes. Cost segregation needs to be exact, as using ineligible property can result in audits by the IRS and possible consequences.
While having an expert by your side can accurately shift all of your property into the proper timeframe categories, there is another matter that must be looked into. That is the fact that cost segregation can only be used for real property and tangible property, while excluding intangible assets. In this article, we will cover the different types of property and how they can or cannot be used in cost segregation.
Real Property
According to the IRS, real property is reserved for land and permanent structures on it. For cost segregation purposes, these assets typically fall into depreciation schedules of either 27.5 years or 39 years. Originally, entire pieces of business real estate were treated as these unified blocks for depreciation, before cost segregation revolutionized the reduction of federal income taxes. Separating tangible property from real property is one of the primary reasons that a cost segregation study is used in the first place.
Real property includes:
- Buildings
- Land
- Permanent structures
- Property that cannot be moved
Tangible Property
This is the heart and soul of cost segregation and the main driver behind depreciation. This is property that can be felt, interacted with, and physically moved. Due to their nature, these assets can be separated into depreciation timeframes of five, seven, or 15 years. While these are separated from the building or real estate itself, they can still be parts of the building or the property as a whole.
For instance, carpeting, lighting, fixtures, flooring, and furniture could all be considered a part of a building, but they are separated as tangible property. Things such as fencing, landscaping, pavement, and parking areas may seem like a part of the land itself, but can be broken down on their own as well.
Other types of tangible personal property include:
- Vehicles
- Machinery
- Appliances
- Flooring
- Computers
- Furniture
- Signage
- HVAC Systems
- Ductwork
- Boilers and water heaters
Intangible Assets
Unlike real or tangible property, these assets cannot be used for cost segregation. In most states, these assets are also separated from business personal property. The value of these items cannot be used to calculate savings or shield a business from federal income taxes.
In general, these are business assets that cannot be touched. Since this includes software, it can often be hard to differentiate between a tangible asset and an intangible one. For instance, computers or servers would be eligible for cost segregation, while the software in them would not. In an increasingly digital world, the ability to separate the three types of asset is paramount.
Intangible property includes:
- Software
- Warranties
- Contracts
- Patents
- Intellectual property
The Extended Federal Deadline is Approaching
While the original deadline for filing taxes was April 15, many businesses have filed extensions, which will see a new final date of October 15. While this means there is still time to plan, complete, and verify a cost segregation study, the window is rapidly closing.
A study is certainly something you want to get right, as it may face an audit. Focus should be given to accurately separating real, tangible, and intangible property, as mixing the two is often the first mistake most businesses make when deciding to explore this avenue of tax reduction.
Why a Professional Study Matters
Separating real, tangible, and intangible property can be a very difficult task, which is why many CPAs know about cost segregation but do not mention it to their clients. The IRS generally prescribes an engineering approach when it comes to cost segregation, and that requires an experienced team that knows how to properly break down an entire piece of real estate into its individual assets.
The minutiae and complexity of cost segregation can be difficult for novices to master, and even experienced tax experts often make mistakes that leave tons of potential depreciation on the table.
O’Connor Is Here to Help
For over 50 years, we at O’Connor have helped our clients get tax reduction through exemptions, property tax appeals, and cost segregation. While we mainly focus on property taxes, we also boast one of the top cost segregation programs in the nation.
To start things off, we offer a free estimate and a complimentary analysis of your business to give you an idea if cost segregation is right for your property. While most businesses do benefit from cost segregation, there are a few situations where the cost of the study may outweigh the potential savings.
If we move forward, our experts will use the IRS-backed engineering method to separate real, tangible, and intangible property and segment each asset into its own appropriate category and timeframe. We can do so with or without a site visit.
While site visits do cost more, they usually uncover much more depreciation and can be helpful in many circumstances. We will also work with your CPA to understand your business’s needs. We will stand by our study and defend it against any audit by the IRS. We offer some of the most competitive cost segregation rates in the nation, so you can be assured that your bottom line will be in the best position possible.
Frequently Asked Questions About Cost Segregation Tangible Property
Q: Does software on my business computers qualify for cost segregation?
A: No, only tangible assets can be used. The computers themselves would qualify, but not the software.
Q: I renovated my building. Is now a good time for cost segregation?
A: Yes, in fact, doing a study after an extensive renovation is one of the best ways to save.
Q: Is landscaping real property or tangible property?
A: Landscaping, fencing, and related items are tangible property, as they depreciate long before permanent structures do.
Q: Is cost segregation only for large businesses?
A: No, any business can use it. Smaller businesses can often see an outsized result by using depreciation.
Q: Can I use cost segregation on my rental home?
A: Yes, rental homes are a commonly overlooked property that can benefit immensely from a study. We offer a discounted rate for rental home portfolios as well.