One of the more interesting things about running a business is the various tax strategies you can employ to help your business thrive. Or maybe they’re one of the more tedious. In any event, taxes can make or break your business. Today, we’re going to talk about one key method of assessment you should be employing on your tax forms. Cost segregation. If you’ve never heard of it, this information is going to inspire you to make some calls to your CPA — it is one of the easiest ways to save yourself a ton of money.
From time-to-time, we have guests on the podcast I host that really get me thinking about a market- or industry-specific question. When I spoke with David and Jodi of Cost Segregation Services Incorporated, I had one of those moments. They brought up the idea of doing a cost segregation instead of straight line depreciation and we explored all the benefits of doing this and when it wouldn’t apply and what I took away from our talk was that it was the most amount of free money you could give yourself as a business owner if you were eligible.
David said explained the difference between the two best:
And so that’s the difference between straight line depreciation which describes the building as a whole and therefore you depreciate that building as a whole over 39 years or 27-and-a-half years. That’s a long time. Or you can describe that building to the IRS in its parts and pieces to break that up and do a study to give value to all those parts and pieces. And then the IRS lets you depreciate some of those parts faster — five, seven, 15 year basis. So you get your deductions upfront versus waiting a long time.
Essentially, while your building may be worth $100,000 and that’s great to depreciate over 39 years, the carpets certainly won’t last that long and so why are you depreciating the cost of the carpets for the same time frame? Companies like CSSI are really exploring this tax saving depreciation since it gives clients more money.
Chances are, you’re doing straight line depreciation. But is that really the best way for you to make sure you’re getting the value of your building? What was your building worth when you bought it versus what it’s worth today, and how would that influence a buyer if you were to show him or her how to do cost segregation depreciation to free up some money upon purchase? We talk a lot about de-risking your business; this is yet another advanced strategy to do so.
Building Value from Building Value
We’re going to use depreciation to build value for us. How? The money we can take out using this method should then be pushed right back into the company. You can use it to hire new staff, get a better operating system or start an advertising campaign to launch a new product. When was the last time you said you were good for cash? There are rare moments in an entrepreneur’s career when she says her cash flow is good, doesn’t need to be bigger.
So if you haven’t already had a valuation done on your property and its various parts and pieces, you should consider it. Some cost segregation analysis companies do free assessments as part of their services; if this appeals to you, we urge you to go down that road. Knowing is half the battle, so once you’ve identified some of the things you can change when it comes to compiling your taxes so you don’t fork over quite so much to the IRS, you can take action.
Accelerating depreciation so you can access your money today, when you need it, is going to help you strengthen your business. You do have to pay it back, so you need to keep that in mind. You and your accountant can figure it out together, according to your current standing. The benefit here is that it is tax free, so you’re not going to pay any more than you used — when do you get to say that when you get a loan? Cost segregation clearly has a strong argument for it.
The New Tax Cuts and Jobs Act
One of the trickier components of this conversation revolved around the new Tax Cuts and Jobs Act. David best explained how it would impact your bottom line (using cost segregation) in our interview:
For instance, with the new tax cuts and jobs act, when someone buys a new building or build a new building in 2018 and beyond the next five years, they’ll be able to depreciate maybe 15 to 30 percent of that building in the first year. It’s called 100 percent bonus depreciation for the parts and pieces that we identified that qualify for that. So that’s huge. You could get quite a bit of cash flow for a million dollar building — $50-80,000 — in that first year of depreciation. Or you could default to looking at the building as a whole and you might get $6,000. Which do you want?
While I’m not an accountant, even I can follow the basic math here. If you are going to be growing your business for the next four to five years or if you have a cash flow crisis going on right now and you need to be able to pull money out thin air, cost segregation may be the solution you need without accruing debt interest. There are some key situations where this may not work — and again, sort that out with your accountant, but typically it will be situations where having an accelerated depreciation of certain assets will not work in your favor during certain deals, etc. — but for the majority, even the recapture is worth it.
Now, there are times you may not have any recapture such as when a building is bequeathed to you. These scenarios are further complicated by step-up basis, so it’s worth asking questions, reading up on it and learning about their full impact before making any large changes. If you really come to understand how this accelerated depreciation positively impacts your operations, you can explain it to a potential acquirer and show them how much cash would be made available to them upon purchase by doing cost segregation.
Room to Grow
This was the perfect reflection for me. Not only is this information I can pass onto my clients, it’s also something that gets me thinking for its larger implications. This act has been around since 1997, yet is only now gaining real traction in the media. Why is that? People don’t ask for it and others don’t know to ask for it.
Now you know, so ask your accountants about this and get them to research it. Perhaps you need to engage a firm like CSSI to come in and perform an assessment as well because your accountant isn’t familiar enough with it. Consider it part of the cost of doing business (and you can even write it off) and get it done.
Imagine unlocking a large chunk of cash tomorrow just because you changed how you depreciate your buildings. What would you do with it? How would you grow your business?