Looking for a new revenue source?
Consider consulting on cost segregation studies
A cost segregation study, which involves identifying the specific assets that make up a building and their costs, can provide benefits to both building owners and to your contracting company. The owner reaps the rewards of considerable tax deferral and you, the contractor, can consult on this much-needed service and thus open up a new profit center.
How it works
A cost segregation study typically separates "real," or structural, property from "personal" property, such as decorative fixtures. Once the personal property is identified, it's analyzed and then classified for federal tax purposes.
The process of classification includes assigning the assets acceptable depreciable "lives," based on the Internal Revenue Code, IRS guidance and case law. Then a report is typically issued outlining the new classifications.
Real property is usually depreciated over 39 years (27.5 years for residential real estate). But a cost segregation study allocates portions of the purchase to shorter lives, which allows the owner to depreciate those segregated assets over five, seven and 15 years.
Thus, the major benefit of a cost segregation study is a significant deferral of taxes and a resulting increase in cash flow for the building's owner in years following the study. How, you might ask? Depreciation deductions are accelerated into earlier years, thus reducing income tax liability for those years.
Cost segregation isn't a risky or aggressive tax scheme. Court rulings dating back to the 1960s support the practice of segregating costs, and in 1997 the U.S. Tax Court ruled that the practice of segregating building costs for tax purposes was allowable.
Show me the money
As you might suspect, cost segregation studies are typically headed up by a CPA. But many look to construction companies to help them gather the relevant information and then develop the study. The contractor receives a consulting fee for his or her services.
You can likely aid in many functions of the process, but perhaps the most significant is that you can help determine the costs associated with qualifying assets, potentially in one of two ways:
- If the building is new construction performed by your construction company, you can merely bundle all of the actual costs associated with an asset.
- If the cost segregation study is being performed on an existing building, you can estimate all of the actual costs associated with each asset using standard estimation techniques.
Either way, determining costs is an important part of the cost segregation study because there can be many underlying costs that are applicable to a particular asset. For example, a piece of equipment used in a restaurant's kitchen may be eligible to be classified as five-year property. And if there's electrical, plumbing or HVAC equipment specifically hooked into that asset, those costs could also qualify to be reclassified as five-year property.
This example illustrates just how important it is that at least one of the people conducting the study have a thorough understanding of construction techniques and costs.
Take the plunge
With the economy not yet healthy, your construction company likely needs to expand its normal construction services. Offering cost segregation studies may be just what the doctor ordered.
After all, you'd not only be helping to provide a valuable service to your clients, but you'd also be building a new profit center that could bring in additional revenue for years to come. Perhaps it's time to consider adding cost segregation studies to your toolbox.