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+++++++++++++++++++++ + +++ + ACCOUNTING +++ +++++++++++++++++++++ Cash Flow Benefits of Cost Segregation By Jeff Jackson, CPA IF the renovation or construction phase of an office building or have owned an office building for several years, there is an important question that you need to review relating to the depreciation of the building and components. What time frame are my assets being depreciated over? Office building owners and tenants have long understood the tax benefits that depreciation has on the cash flow of the business or rental. Depreciation expense is a deduction that reduces income and thereby increases cash flow. The shorter the depreciation period, the quicker the tax benefit is derived. Commercial real estate is generally depreciated over 39 years, personal property such as furniture and fixtures over five or seven years, land improvements over 15 years — and the land costs are not depreciated. A review of the components of the building needs to be performed to ensure that the shortest depreciation periods allowed are used. YOU ARE IN Often, these reviews are performed as a cost segregation study. If you could take a portion of a building that would normally be depreciated over 39 years and instead depreciate that portion in five or seven years, there would be an immediate and substantial tax benefit. Several items that are normally classified as "part of the building" can be determined to have shorter lives attributed to them. For some items, the distinction follows common sense. For example, an ordinary desk is personal property where a load-bearing wall is part of the building. However, for many items such as lighting fixtures, signs, floor coverings, plumbing, electrical systems and cooling systems, the distinctions are governed by tax rules that can be complex and can involve projections as to the future use of the items. These may also require consultation with engineers or other construction experts. An example of this is the special electrical system that must be added to power the use of equipment such as radiology imaging machines. To the extent that the electrical system is specially allocated to running such equipment, that portion of the electrical can be depreciated over seven years as part of the machinery versus the 39 years if left as "part of the building." Also, after the personal property and building items have been separately identified, you must value them with either an appraisal or a breakdown of the construction costs or both. The obvious benefit will be that your depreciation deduction will be larger, which in turn increases cash flow for operating needs or other investment opportunities.