If you are seeking opportunities to improve your company's cash flow, consider a fixed asset or cost segregation study. Manufacturing is a capital-intensive industry, so it is critical to ensure that fixed assets are classified properly to recover their costs as quickly as possible.
FIXED ASSET STUDY
A fixed asset study examines all depreciable assets — including real property, equipment, machinery, fixtures and furniture — to determine whether you have misclassified any assets. Properly classifying assets in a category with a shorter depreciable life will accelerate depreciation deductions, potentially lowering taxes and boosting cash flow.
These studies are not just for the most recent tax year. A fixed asset study may also create an opportunity to claim refunds for depreciation deductions missed in previous years.
COST SEGREGATION STUDY
A cost segregation study is a type of fixed asset study that focuses on the costs of buying, building or substantially improving a building or other real property. Generally, commercial real estate (other than land) is depreciable over 39 years, while residential real estate is depreciable over 27½ years. A cost segregation study identifies assets that might be treated as building components, but are properly classified as personal property depreciable over five or seven years or as land improvements depreciable over 15 years.
Related Read: A Cost Segregation Study Is One Way To Boost Cash Flow
Examples of building components that may qualify for accelerated depreciation include:
- The costs of reinforced foundations;
- Specialized electrical, plumbing, cooling or ventilation systems; and
- Other structural components that are required by the manufacturing process rather than the operation of the building.
By allocating a portion of the building costs to these shorter-lived assets, you can accelerate depreciation deductions and substantially reduce your tax bill. It may even be possible to write off the full cost of these assets in year one under the bonus depreciation or Section 179 expensing rules.
Related Read: Why Wait to Deduct Your Purchases? Turbocharge Tax Deductions With Bonus Depreciation and Sec. 179
NOW IS THE TIME
During the COVID-19 pandemic, many manufacturers have reconfigured their plants or office spaces, or otherwise made improvements to their buildings to comply with new health-related requirements. Now may be an ideal time to conduct a fixed asset or cost segregation study to maximize the tax benefits associated with these investments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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