At PM Business Advisors, we are committed to doing our part to help prevent the spread of Coronavirus (COVID-19) within our communities, and we are continuously monitoring this evolving situation. We anticipate little disruption to our business in rendering our seamless client delivery solutions to our clients. Our team is equipped with the latest technology to work remotely, and we have implemented robust work-from-home policies that protect data security and client information. While we are confident that the economy will eventually recover, we also understand the essential importance of taking advantage of every opportunity available to improve cash flow for businesses at this critical time.
How a Cost Segregation Study can Improve Cash Flow
One opportunity to significantly improve your cash flow is by accelerating depreciation of any recently purchased or renovated commercial, industrial or rental real estate investments by engaging a consultant to complete a cost segregation study. This study can be performed for any asset on the balance sheet as of 12/31/19 and significantly reduce your tax payment today. This money can then be applied to assisting with the current crisis.
In the absence of a cost segregation study, your assets are likely being depreciated on a 39-year basis for commercial property or 27.5 years for residential. Utilizing a cost segregation study, per IRS Audit Techniques Guide (ATG), certain components and site improvements of the building can be reclassified with shorter depreciation lives of 5 and 15 years.
A change in the IRS code through the TCJA now provides a bonus deprecation of 100% for those accelerated classes. By way of example, absent a cost segregation study a commercial property, acquired at $2M, would result in a tax deduction of $51,282 this year with the total capital investment depreciated over 39 years. With a qualified cost segregation study potentially one-third of the asset could be reclassified with accelerated lives. You would realize a tax deduction of $600,000, a net improvement in cash flow of $550,000 for a $2M capital investment.
PMBA has the experience and reputation for providing you with this analysis in a timely fashion despite the current travel restrictions. Our firm has been successful at reclassifying between 20% and 35% of a building’s components to accelerated depreciation. As all investors face the current economic headwinds with little ability to understand when they will abate, improved cash flow will become increasingly important to sustaining businesses in the near future.
We are happy to answer any questions and to provide a complimentary preliminary analysis of your tax savings. Contact us at info@pmba.com