For design firms in the United States, navigating tax strategy can be daunting, but one powerful tool remains underutilized: Cost Segregation Studies. Whether you’re a shareholder, CFO, or finance director, understanding how cost segregation can optimize your tax position is critical to maximizing your firm’s financial potential.
What is Cost Segregation?
Cost segregation is a tax-saving strategy that identifies and reclassifies personal property assets embedded in a building’s structure. By accelerating depreciation deductions, firms can significantly reduce taxable income in the early years of ownership or construction.
The Benefits of Cost Segregation for Design Firms
- Accelerated Tax Deductions:
Design firms investing in office spaces, warehouses, or specialty facilities can shift building components like electrical systems, flooring, or HVAC into shorter depreciation schedules (5, 7, or 15 years instead of 39). - Increased Cash Flow:
By front-loading tax deductions, firms can retain more cash to reinvest in growth, talent acquisition, or new projects. - Eligibility for Bonus Depreciation:
Under recent tax reforms, certain assets qualify for 100% bonus depreciation. This is a game-changer for firms purchasing or constructing new facilities. - Supports Strategic Decision-Making:
Cost segregation studies not only reduce tax burdens but also provide a detailed breakdown of assets, supporting better financial planning and project evaluation.
Real-World Example
A design firm specializing in commercial construction recently undertook a cost segregation study on a newly purchased $5M office building. Through this process, over $1M of the building’s components were reclassified into shorter asset lives, saving the firm $300,000 in taxes within the first year.
How to Get Started
- Work with Experts: Engaging a qualified cost segregation specialist ensures compliance with IRS guidelines and maximizes the study’s benefits.
- Timing is Key: While studies can be conducted retroactively, initiating one during a new purchase or construction phase yields the best results.
- Collaborate Internally: CFOs and finance directors should align with stakeholders to prioritize cost segregation in overall tax planning strategies.
Why Design Firms Should Prioritize Cost Segregation
With tight profit margins and rising project costs, leveraging every tax advantage is essential. Cost segregation isn’t just a strategy—it’s a competitive edge.
For more detailed insights, visit Corporate Tax Advisors, Inc. (CTA) ’s website and explore.
