> Case Studies > Manufacturing #2
How Your CPA Firm Can Drastically Reduce the Tax Burden in the Early Years of Owning Your New Building
When the owner of a long-time manufacturing job shop mentioned the company had outgrown its space and would be building a new facility, BPK&Z was listening and recognized taxes on the new building would be a big issue for this client.
“When you take on a new building, cash just starts flying out the door,” said John Csargo, CPA, MBT, CFP®, one of BPK&Z's tax experts. “Maximizing the tax benefits of the building helps provide some of the cash needed to comfortably make the new mortgage payments on the building.”
BPK&Z instantly recommended that this client – which focuses on precision and CNC machining and does a lot of government work – arrange for a cost segregation study.
A cost segregation study identifies and reclassifies property assets to shorten the depreciation time for taxation purposes. Doing this reduces current income tax obligations and allows for more cash flow in the early years of owning a new building. Property assets include a building's non-structural elements, exterior land improvements and even cable wiring.
Before the cost segregation study, all of the assets of the new facility were set to depreciate over 39 years. After the cost segregation study, 17 percent of the building was reclassified to a seven-year depreciable life and an additional 17 percent was reclassified to a 15-year depreciable life.
As a result, the deferral of taxes generated over $240,000 (in today's dollars) of benefit for the client.
“This was a huge tax dollar savings for them upfront,” Csargo said. “While they used a lot of the tax deductions in the early years at the expense of deductions in the future, we recommended that they invest part of the money they saved initially to offset the taxes they'll incur later on.”
Quick Fact:
An ideal cost segregation candidate will have a building that is worth at least $1 million.
BPK&Z offers free cost segregation consults to educate business owners on the benefits and costs of doing a cost segregation study. If you're interested in a free consult, call John Csargo at (763) 546-6211 or email .