Cost Segregation

Today TaxMama hears from Kim in Indiana who tells us. “My father is building a service center to do auto body repair work. The building is quite expensive. What kind of deductions can we get immediately? The accountant says that it will take 39 yrs to retrieve the money that he is investing. Are there any special deductions that we can take now to help offset the expense?”

Dear Kim,

How smart of you to do some extra digging. You’re so right. That building is very expensive to construct. And there are some tax benefits you can get in less than 39 years.

There is something called ‘cost segregation”. Since your dad is doing the construction – and you’re doing the bookkeeping – it should be easy to identify the costs of the various things being built. After all, you have the invoices.

There’s an 2004 article in the Journal of Accountancy that shows some breakdowns of parts of buildings that can be depreciated faster than 39 years.
http://www.aicpa.org/pubs/jofa/aug2004/soled.htm

For instance, the electrical distribution systems can be depreciated over 5 years. Same thing with the lighting systems.

IRS discusses cost segregation in one of their audit guides. You might want to read it.
http://www.irs.gov/businesses/article/0,,id=134670,00.html
http://www.irs.gov/businesses/article/0,,id=134133,00.html

Perhaps you and your dad’s accountant can do some research to find out exactly what parts of the construction can be separated out to be depreciated for 5, 7, or 15 years.

You’ll get some help in the listing of class lives in IRS Publication 946 – How to Depreciate Property
http://www.irs.gov/publications/p946/ar02.html#d0e10880

In addition, a lot of his cost is for the equipment being built into each of the service bays. Those costs might even qualify for Section 179 depreciation, which would allow your dad to deduct the full cost right now – depending on how much he spent on the equipment. Also, it’s important to consider if dad needs to use ALL those deductions so soon. He might prefer to wait until he has some income.

http://www.irs.gov/publications/p946/ch02.html

You’ve got the right kind of mind to become a good tax professional. Consider extending your studies in that area.

And remember, you can find answers to all kinds of questions about speeding up deductions and other tax issues, free. Where? Where else? At TaxMama.com

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