Useful life classifications for Cost Segregation and Bonus Depreciation

[Julio Gonzalez]

A cost segregation study is a strategic tax planning tool that separates the assets that have a shorter useful life and can be depreciated over 5, 7 and 15 years from the residential rental property or nonresidential real property that are depreciated over 27.5 and 39 years, respectively. By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. This also allows for property owners to more easily write-off assets that get damaged/destroyed as the value of these assets is determined as part of the study. You will receive a report as a result of the cost segregation study that supports the breakout between asset classes and new depreciation schedule in the event that you are audited by the IRS.

Here is an example of some items included in a restaurant and their useful life classification:

5 Year Classification

• Awnings and canopies
• Beverage Equipment
• Computers
• Data Handling Equipment
• Doors (Special lightweight doors installed to prevent accidents in areas with heavy traffic)
• Drive-thru equipment
• Fire protection equipment
• Floors (installed with strippable adhesive)
• Kiosks
• Window treatments
• Wall covering (strippable wallpaper)
• Sound systems
• Signs (display trade name)
• Retail furniture
• Retail fixtures
• Refrigeration equipment
• Millwork - Decorative

7 Year Classification

• Office furnishings

15 Year Classification

• Concrete, Foundations and Footing (related to light poles, signs, and land improvements)
• Trash enclosures (freestanding enclosure typically on concrete pad)
• Site work
• Parking lots

39 Year Classification

• Ceilings
• Concrete, Foundations and Footing (related to the proper setting of the building)
• Doors (interior and exterior)
• Air curtain doors
• Electrical
• Elevators and Escalators
• Exit signs
• Fire protection and alarm systems
• Floors
• Floor covering (installed with permanent adhesive, nailed or screwed in place)
• HVAC
• Windows
• Walls (interior and exterior)
• Wall coverings
• Trash Enclosures (attached to the building)
• Site utilities
• Signs (exits, restrooms, room numbers, etc)
• Roof
• Restroom partitions
• Refrigerated structures (cold storage, walk in freezer, etc)

Millwork (general building or structural)