Cost Segregation - Tax Deductions
"Few of us ever test our powers of deduction, except when filling out an income tax form” - Laurence J. Peter, U.S. Educator
By understanding business tax deductions, business owners may enjoy personal benefits from business expenditures – entertaining clients or donating to charitable organizations, - if they follow the myriad tax rules.
Only half of business entertainment expenses can be deducted. Eligible business entertainment consists of taking a client to a ball game, a concert, or dinner at a good restaurant. However, if you are audited, there must some verification that the entertainment expense was related to business. You must therefore file all bills carefully, mentioning the purpose of the bash against each bill.
For a charitable event, only a portion of the ticket value is deductible. The portion that is NOT deductible is the value of the goods or services that you receive (e.g. dinner, entertainment, etc.). The rest is deductible. For example, if you pay $150 for an event, and the benefits received are worth $60, the tax-deductible amount is $90. The charity hosting the event will be able to identify the exact value of the benefits for each event.
The wisdom of tax planning is to take advantage of all the benefits Uncle Sam has to offer. An increasingly popular federal tax savings phenomenon is utilizing a cost segregation study (CSS). These studies offer business owners of improved commercial real estate the opportunity to defer taxes, reduce their overall current tax burden, and free up capital by improving cash flow. A CSS study will identify any item that can be depreciated over a shorter period of time. These studies can result in accelerated depreciation deductions for properties including new buildings being constructed, renovations of existing buildings, leasehold improvements, and the purchase of real estate.
The primary goal of cost segregation is to identify building components that can be reclassified from real property to personal property. This results in a substantially shorter depreciable tax life and accelerated depreciation methods. Ordinarily, the cost of real, or section 1250, property is recovered over lengthy periods (27.5 and 39 years for residential and nonresidential property, respectively), using the straight-line method of depreciation. Personal, or section 1245, property is recovered over considerably shorter periods (5, 7 or 15 years), and employs accelerated methods of depreciation, such as 200% or 150% declining balance.
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