Cost Segregation Studies: A Hidden Opportunity for Manufacturers

Cost segregation is a tax planning strategy that can provide significant benefits for manufacturing businesses with substantial investments in facilities and equipment. This article explores how manufacturers can leverage cost segregation studies to accelerate depreciation deductions and improve cash flow.

What is Cost Segregation?

Cost segregation is the process of identifying building components that can be classified as personal property or land improvements, rather than real property. This reclassification allows for shorter depreciation recovery periods (5, 7, or 15 years instead of 39 years for commercial property), resulting in accelerated depreciation deductions and improved cash flow.

Benefits for Manufacturers

Manufacturing facilities often contain numerous components that qualify for accelerated depreciation, including:

• Specialized electrical systems for manufacturing equipment
• Process piping and plumbing systems
• HVAC systems for process cooling or ventilation
• Reinforced flooring for heavy machinery
• Specialized lighting systems
• Loading docks and material handling systems

By properly identifying these components, manufacturers can significantly reduce their tax burden in the early years of asset ownership.

Case Study: Metal Fabrication Company

A metal fabrication company with a recently constructed $5 million manufacturing facility conducted a cost segregation study. The study identified $1.8 million in assets that could be reclassified from 39-year real property to 5, 7, and 15-year property. This reclassification generated additional first-year depreciation deductions of $420,000, resulting in tax savings of approximately $147,000.

Implementation Process

To implement a cost segregation strategy, manufacturers should follow these steps:

1. Engage Qualified Professionals: Work with CPAs and engineers experienced in cost segregation studies for manufacturing facilities.
2. Conduct a Feasibility Analysis: Determine if the potential tax benefits justify the cost of the study.
3. Perform the Study: Document and classify assets according to IRS guidelines.
4. Implement Tax Reporting: Properly report the reclassified assets on tax returns.
5. Consider Look-Back Studies: For existing facilities, consider a look-back study to claim missed depreciation from prior years.

Conclusion

Cost segregation studies represent a valuable tax planning opportunity for manufacturers with significant investments in facilities and equipment. By accelerating depreciation deductions, manufacturers can improve cash flow and reinvest in their businesses. Contact Schapira CPA to learn how a cost segregation study could benefit your manufacturing operation.