Increase Cash Flow with Accelerated Depreciation!

[Julio Gonzalez]

Did you know that you can increase your cash flow simply by utilizing accelerated depreciation of your real estate property? By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. In order to determine if your property is eligible and ensure your assets are assigned to their respective recovery periods, a cost segregation study is needed.

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. This is done using MACRS (Modified Accelerated Cost Recovery System).

The IRS determines the useful life also known as the recovery period. Here are some examples of the recovery periods from the IRS 996 Publication:

• 5-year Property: Automobiles, qualified technological equipment, office equipment (copiers, calculators, etc.), appliances, carpet, and furniture used for residential real estate.
• 7-year Property: Office furniture and fixtures (desks, filing cabinets, safes)
• 15-year Property: Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges)

There are multiple approaches to cost segregation studies including the Detailed Cost Approach, Detailed Cost Estimate Approach, Survey Approach, Residual Estimation Approach and Sampling Approach.

If you feel like you or your business could benefit from a cost segregation study, first speak with your accountant to see if the tax savings outweigh the potential costs. If you determine that a cost segregation study is beneficial to your business, ensure you work with a qualified professional that conducts the study in accordance with the IRS standards and audit techniques.

What are your favorite tax savings strategies?