Cost segregation is a tax strategy that involves separating acquired or constructed business property into components that can be depreciated at different rates for tax purposes. This can increase cash flow by accelerating depreciation deductions in early years. A cost segregation study of a $6 million manufacturing plant increased first 7 years depreciation from $1 million to $2.3 million, providing $500,000 more after-tax cash flow. Qualifying properties must be acquired or constructed after 1986, have an acquisition cost over $1 million, and not have been previously segregated. Cost segregation studies use invoice or engineering methodologies to analyze property components and costs to maximize tax benefits.

1. Cost Segregation
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2. Benefits of Cost Segregation
Decreased
Rapid
Depreciation Tax Burden
Reduced Increased
Funding Cash Flow

3. Actual Cost Segregation Study
$6 Million Manufacturing Plant
Standard 1st 7 Years Depreciation:
$1m
After Cost Segregation 1st 7 Yrs:
$2.3m
After-Tax 1st 7 Yrs Cash Flow:
+$500,000
Cost Study ROI greater than 100 fold

4. Qualifying Properties
Acquired/Constructed after 1986
Acquisition cost >$1 million
Costs not segregated prior
Substantial remaining basis

5. Obtain Information – Invoice
Approach
Cost of construction – AIA/Developer documents/drawings
Land allocation
Date of construction / acquisition
Soft cost details
Tax depreciation schedule

6. Invoice Methodology
Interviews with Appropriate Parties

Use of Common Nomenclature

Use of Standard Numbering System

Explanation of the Legal Analysis

Determination of Unit Costs and Engineering

“Take Offs”
Organization of Assets into Lists, Groups, or

Divisions
Reconciliation of the Total Allocated Costs to

the Actual Costs
Explanation of the Treatment of Indirect Costs


7. Invoice Methodology
Identification and Listing of Section 1245

Property
Narrative Report

Schedule of Assets

Schedule of Direct and Indirect Costs

Schedule of Property Units and Costs (If

any)
Statement of Assumptions and Limiting

Conditions
Exhibits


8. Obtain Information – Engineering
Approach
Obtain closing documents
Site survey
Building plans
Tax depreciation schedules
Collect any drawings or other substantiating documents

9. Engineering Methodology
Includes all of the Invoice Methodology

with the addition of:
 Site Survey by Engineers
 Facility and Drawings recreated by
Engineers
 Take-offs generated
 Estimates created with recognized sources
such as RS Means
 Costs prorated to acquisition cost

10. Reconcile Costs
Reconcile closing documents or construction costs to
balance sheet / tax depreciation accounts
Determine capitalized soft / indirect costs
Determine unit costs
Apply unit costs to actual

11. Component Cost Analysis
Isolate property
components –
building vs. structural
Determine
component costs
Allocate soft /
indirect costs

12. Form 3115
Allocate segregated costs to tax
depreciation assets
Prepare attachments to form 3115
Prepare form 3115

13. Our Report to the Owner
Summary
Prepare Tax Prepare Prepare
Statement of
Depreciation Cash Flow NPV
Additional
Summary Analysis Analysis
Cash Flows

14. Recap of Cost Segregation
Benefits
Improve
Return on
Reduce
Investment
Ad
(ROI)
valorem
Taxes
Improve Maximize
Tax Rates Tax
on Sale of Deferrals
Property
Increase
Reduce Cash
Funding Flow

15. Cost Segregation
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