Many restaurant and hotel property owners are often unaware of the opportunities for significant tax savings, and how to take advantage of them via a cost segregation study. This service utilizes reduced taxable income by maximizing the depreciation allowable on a property’s assets. The benefits of a cost segregation study can have significant effects for you and your business, as the cash flow saved by not paying a higher tax liability in the current year could be substantial.
When commercial property is purchased, a depreciable life is assigned to it. This depreciable life is typically 39 years, and the value of the asset “depreciates” over the 39-year life. As a result, the deduction received on the tax return is 1/39th in any given year. On a property purchased for $3,900,000, this would equate to $100,000 per year.
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In contrast, a cost segregation study drills down into the depreciable lives of the assets. Instead of allocating the purchase price all to a 39-year life, it will assign a portion of the purchase to the furniture, fixtures, and other improvements whose lives may be much shorter than 39 years. This will have the following effect:
If the $3,900,000 property had $1,000,000 worth of furniture and fixtures at a 7-year life, this would mean that in one year, the depreciation would be approximately $142,000 ($1.0M/7 years) on that portion of the furniture and fixtures, and approximately $74,000 on the remaining 39-year lived assets (($3.9m-$1.0M)/39), for a total deduction of approximately $216,000—a significant increase. Instead of only a depreciation deduction of $100,000, you now see a deduction of $216,000. If your effective corporate tax rate is at 30%, this is a $35,000 savings in the first year alone.
If your business has not thought about a cost segregation study, now is the time to consider taking advantage of these potential tax savings. You are encouraged to contact the professionals at Citrin Cooperman or your trusted business advisors to evaluate the best path forward.
Citrin Cooperman is one of the nation’s largest professional services firms, providing assurance, tax and business advisory services to companies in a variety of industries. Our daily mission is to help our clients “focus on what counts”.
Jennifer Hogencamp is a partner in Citrin Cooperman’s Providence office, with almost 20 years of public accounting experience. Jen provides audit services to a wide array of clients including those in the education, hospitality, technology, and manufacturing and distribution industries.
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