Contact UsAs the Tax Director for a real estate conglomerate with several commercial buildings undergoing significant improvements to the building envelope, I am contemplating having a cost segregation analysis. However, a colleague informed me that I should also consider incorporating construction tax planning as well. Can someone please help me understand the difference between cost segregation and construction tax planning?
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Tax Professional Answers
Peter Scalise, SAX LLP
Yes, there are notable differences between a Cost Segregation Analysis and Construction Tax Planning.
The below synopsis will serve as an overview of the scope, application, and synergies between the two service offerings to better understand how to design and implement a methodology that will optimally tax effect your expenditures for renovating your commercial buildings.
A Cost Segregation Analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 or 39 years) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, 7 or 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site visits are conducted to review the building envelope as part of a Cost Segregation Analysis to ensure sustainable assessments for tax return fling positions.
In contrast, Construction Tax Planning uses a proactive "Pre-Design Phase" approach to identifying additional tax benefits related to new and planned construction projects whether for constructing a new building; adding a new wing to an existing building; or merely renovating a single floor within an existing building.
Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the "Construction Phase" to ensure that the structural components will be classified as personal property as opposed to real property (e.g., use of a modular wall as opposed to permanently affixing a wall to bifurcate office and / or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property as opposed to real property).
In addition, Form 3115 is never filed as Construction Tax Planning is proactive and not reactive. Noting, there is no need to reclassify asset classifications as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk as an accounting method change never occurred and therefore Form 3115 is not filed. It should be duly recalled that Accounting Method changes only occur when a transaction is treated a certain way on a tax return (i.e., regardless of correctly or incorrectly) for a period of two years or more.
Finally, and as applicable, by combining Cost Segregation Analysis with both the principles of Construction Tax Planning and Abandonment Deduction Planning (e.g., the retirement or abandonment of structural components within the building envelope before they have been fully depreciated over their asset class life for tax return purposes) you will optimally tax effect your expenditures for renovating your commercial buildings.
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566 weeks ago
The below synopsis will serve as an overview of the scope, application, and synergies between the two service offerings to better understand how to design and implement a methodology that will optimally tax effect your expenditures for renovating your commercial buildings.
A Cost Segregation Analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 or 39 years) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, 7 or 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site visits are conducted to review the building envelope as part of a Cost Segregation Analysis to ensure sustainable assessments for tax return fling positions.
In contrast, Construction Tax Planning uses a proactive "Pre-Design Phase" approach to identifying additional tax benefits related to new and planned construction projects whether for constructing a new building; adding a new wing to an existing building; or merely renovating a single floor within an existing building.
Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the "Construction Phase" to ensure that the structural components will be classified as personal property as opposed to real property (e.g., use of a modular wall as opposed to permanently affixing a wall to bifurcate office and / or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property as opposed to real property).
In addition, Form 3115 is never filed as Construction Tax Planning is proactive and not reactive. Noting, there is no need to reclassify asset classifications as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk as an accounting method change never occurred and therefore Form 3115 is not filed. It should be duly recalled that Accounting Method changes only occur when a transaction is treated a certain way on a tax return (i.e., regardless of correctly or incorrectly) for a period of two years or more.
Finally, and as applicable, by combining Cost Segregation Analysis with both the principles of Construction Tax Planning and Abandonment Deduction Planning (e.g., the retirement or abandonment of structural components within the building envelope before they have been fully depreciated over their asset class life for tax return purposes) you will optimally tax effect your expenditures for renovating your commercial buildings.