Renovating an older food manufacturing facility, or building a new one altogether, is a complex process with a lot of moving parts. You need to vet firms and contractors, navigate design decisions, select materials, choose equipment, consider the possibility of future expansion…the list goes on and on.
Like with any investment, there are always ways to cut costs based on what options you select for your facility — but what if you could reap savings off the top, regardless of what materials and equipment you choose? With a cost segregation study, you can.
What is a cost segregation study?
A cost segregation study is an assessment of your assets focused on properly classifying them in order to maximize tax savings. Proper classification of assets can reduce short-term tax liabilities, thereby freeing up resources to reinvest in your business.
By conducting a cost segregation study, you can identify project-related investments eligible for bonus depreciation (a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible business assets) that you otherwise may have missed.
Under the recently passed Tax Cuts and Jobs Act of 2017, the bonus depreciation percentage is increased to 100% and now applies to used property as well. This significantly increases the benefits of cost segregation studies on both new and purchased properties.
Moreover, a cost segregation study can shorten the tax depreciable lives of a portion of your renovation from a 39 year recovery period to either 5, 7 or 15 years.
How does cost segregation work?
Let’s say you’re constructing a plant for $1 million. Many owners might take that cost, depreciate it over the standard 39 years for tax purposes and call it a day.
However, a cost segregation study brings in accountants with engineering and construction backgrounds to analyze the various elements of your facility and break out different categories, such as:
- Interior offices
- Parking lot and lighting and striping
- Server rooms
- Single-purpose rooms (i.e., chiller rooms)
These different types of assets are treated differently for tax purposes. Things like robotics and computers are categorized differently than the actual infrastructure of the building itself.
How does cost segregation save me money?
By separating out and accelerating eligible items that aren’t just the “bricks and mortar” of the structure, you could reap significant tax savings up front. Now you may be able to pull $400,000 out of that $1 million cost and apply bonus depreciation to those assets and potentially reclassify some of the remaining $600,000 to a shorter cost recovery period.
With a thorough cost segregation analysis in hand, your business can adjust the timing of taxes owed on property related to capital investment projects or make retroactive adjustments that may result in a tax refund. Either way, this IRS-approved tax planning strategy can help your business maximize cash flow and minimize overpayment.
Greg DeVino is the lead tax partner at RSM US LLP’s Jacksonville, Florida office. He also serves as the Southeast Region Leader for RSM’s Credits, Incentives and Methods (CIM) group. Prior to joining RSM, DeVino served as a senior tax manager with a large CPA firm and spent over ten years with a Big Four accounting firm in their Jacksonville tax practice. He is a certified public accountant in Florida and Georgia and is a member of the AICPA and the FICPA.
Note: This post is based on an excerpt from Stellar’s e-book, “Cuts, Credits and Write-offs: How food and beverage manufacturers can leverage the Tax Cuts and Jobs Act of 2017.”