Depreciation and Accelerated Depreciation
Depreciation is the use of an asset will cause a loss of value over time after its initial purchase due to its deterioration or normal wear and tear. The declining value of an asset each year is called depreciation. Businesses are allowed to depreciate their tangible assets over their useful life in accordance with rules set up by the IRS. By depreciating these assets, the business may gain needed tax savings. Commercial and residential building assets can be depreciated either over 39 years straight-line for commercial property, or 27.5 years straight line for residential property as dictated by the current U.S. Tax Code.
Accelerated Depreciation is an accounting practice that allows the owner of an asset to depreciate the asset more quickly by using a shorter period of depreciation than the traditional straight-line method. The Internal Revenue Service (IRS) allows building owners this opportunity for accelerated depreciation by utilizing the Modified Accelerated Cost Recovery System (MACRS) to depreciate certain land improvements and personal property over a shorter lives than 39 or 27.5 years. Certain land improvements can be depreciated over 15 years at a 150% declining balance, with certain personal property depreciated over 7 or 5 years at a 200% declining balance.
How Can Accelerated Depreciation Help My Business?
By using accelerated depreciation, an asset with a tax basis may now be written off more quickly. By doing this, a businesses’ taxable income can be reduced, and businesses can use those tax savings to invest back into their business. In order to appropriately accelerate the depreciation of your assets, property owners will need a cost segregation study. These studies should be performed by professionals with construction, engineering and appraisal experience to correctly segregate the costs of your assets into either 5, 7, 15, 27.5 or 39 year lives.
Advantages of Accelerated Depreciation
There are many advantages of having a cost segregation study done for the purposes of accelerating depreciation. Businesses may reduce their tax liability and their taxable income, which in turn will allow them to have access to increased cash flow. When a cost segregation study is performed, most of the benefit of accelerated tax depreciation will come both in the first year and the first few years after that. This is the greatest benefit of accelerated depreciation.
Are There Any Possible Disadvantages?
Not everyone is in the tax situation where the use of accelerated depreciation would be beneficial to them. With that being said, not everyone needs a cost segregation study. If a business is not currently profitable, it doesn’t necessarily make sense for them to pay for a study. Someone may argue that they are confident that the business will become profitable in a few years, and you should go ahead do a cost segregation study. Ernst & Morris has been providing cost segregation to clients for over 24 years, and one of the reasons why our clients love us is the fact that we will not hesitate to let you know that you would not benefit from a cost segregation study.
What Should I Do Now?
The only way to have your assets depreciated properly is to have a detailed engineering based cost segregation study performed on your property. Since 1993, Ernst & Morris Consulting Group, Inc. (E&M) has been providing hundreds of CPA firms and clients across the country with our engineering approach to cost segregation, which includes our work paper documentation and detailed engineering based report that has survived IRS audits for nearly 25 years. Our professionals possess over 150 years of combined cost segregation experience, solely with E&M. So, if you have any questions about accelerated depreciation, give us a call to today at 1-800-COSTSEG or request a call back.
According to a recent article in the AICPA’s Journal of Accountancy,
“Selecting a firm that uses qualified professionals with years of significant, relevant experience can be an important differentiator in the quality of a cost segregation study.”
Journal of Accountancy
© From the AICPA