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Tax Framework Guidelines:
Cost segregation studies are conducted to align with specific provisions of the United States tax code, primarily under the Modified Accelerated Cost Recovery System (MACRS). The MACRS is a tax depreciation system that determines the depreciation deductions for tangible property. The following tax laws and regulations provide the framework for conducting cost segregation studies:
Internal Revenue Code (IRC) Section 1245: This section pertains to the recapture of depreciation deductions upon the sale or disposition of certain tangible property. Cost segregation helps identify personal property assets subject to IRC Section 1245 rules, which may qualify for shorter depreciable recovery periods.
Internal Revenue Code (IRC) Section 1250: This section outlines the rules for the recapture of depreciation deductions for real property. Cost segregation helps differentiate between personal property (shorter recovery periods) and real property (longer recovery periods) under IRC Section 1250.
Internal Revenue Code (IRC) Section 168: This section covers the MACRS depreciation rules, including the recovery periods for various classes of assets. Cost segregation studies follow the classification and recovery period guidelines provided by IRC Section 168 to determine appropriate depreciation schedules for reclassified assets.
IRS Revenue Ruling 62-113: This ruling sets the foundation for cost segregation studies by acknowledging the principle that buildings consist of components with different depreciable lives.
Tax Court Cases: Various Tax Court cases have established precedents for cost segregation studies and the reclassification of assets for tax purposes. These cases have provided guidance on the eligibility criteria and methodologies for conducting these studies.
It’s important to note that tax laws and regulations can change over time, and interpretations may vary based on specific circumstances. Businesses considering cost segregation studies should work closely with tax professionals who specialize in this area to ensure compliance with current tax laws and regulations while optimizing their tax benefits.
There are certain limitations surrounding cost segregation. It can only be performed on buildings constructed, acquired, enhanced, or expanded in 1986 or later. Additionally, certain industries tend to have buildings with the most potential for tax deferral and improved cash flows. These industries include but are not necessarily limited to the following:
- Real Estate Development and Investment
- Auto dealerships
- Hospitals and medical facilities
- Industrial facilities
- Manufacturing facilities
- Office buildings
- Retail stores and shopping centers
- Apartment or condominium complexes
- Supermarkets and restaurants
It is important to note that while cost segretation studies can provide tax benefits, they require careful consideration and expertise to ensure proper execution within the bounds of the tax laws.
Call us today for a consultation regarding a cost segregation study today!