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A Cost Segregation Study Can Boost 2014 Depreciation Deductions

July 01, 2014

For manufacturers (and other businesses), cost seg studies can have huge benefits.

Over the past several years, manufacturers (and other businesses) have taken advantage of 50% bonus depreciation and enhanced Section 179 expensing to increase their current-year depreciation-related deductions. Normally purchases of equipment and other assets must be depreciated over a period of years. But these two breaks allow a larger portion — or even all — of the purchase price to be deducted in the year that qualifying assets, such as equipment, are purchased and placed in service.

Unfortunately, for most assets, bonus depreciation expired Dec. 31, 2013. In addition, the Section 179 expensing limit dropped from $500,000 to $25,000 on Jan. 1, 2014. Congress could revive one or both of these breaks retroactively to Jan. 1. In fact, many prognosticators expect this to happen. But many also predict that the legislation won’t be passed until Congress’ lame-duck session after the midterm election in November.

What can you do now to help ensure you’ll have ample depreciation deductions to reduce your 2014 tax bill? Consider a cost segregation study. You might benefit from such a study if your business has acquired, constructed or substantially renovated a building recently.

Commercial buildings and building improvements generally must be depreciated over 39 years. A cost segregation study identifies building components that can be depreciated over a shorter time period — typically 5, 7 or 15 years, depending on the type of asset. In addition, these assets may be eligible for MACRS depreciation, which allows larger deductions in the earlier years of an asset’s depreciable life.

Examples of building components eligible for quicker depreciation include machinery and equipment, movable partitions and cubicles, wall and floor coverings, window treatments and awnings, lighting, and even certain wiring and plumbing. Land improvements such as landscaping, parking lots and drainage also may be eligible.

It’s important to keep in mind that cost segregation studies simply accelerate deductions; they don’t increase the total deductions taken over an asset’s life.

To learn more about cost segregation studies and determine whether one might increase your 2014 depreciation deductions — and reduce your tax bill — please contact us.

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