Side Effects of Cost Segregation

Increased current cash flows and net-present-value savings from accelerated tax depreciation resulting from cost-segregation studies have been discussed in the JofA and other professional literature. But the initial cost-segregation decision can determine later tax side effects, both positive and ne...

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Bibliographic Details
Published in:Journal of Accountancy 2012-04, Vol.213 (4), p.49
Main Authors: Maples, Larry, Hayes, Robert D
Format: Article
Language:English
Subjects:
Accelerated cost recovery system
Accounting
Accounting standards
Cash flow
Cost allocation
Cost control
Effects
Fair market value
Like kind exchange
Personal property
Revenue procedures & rulings
Tax courts
Tax rates
Taxpayers
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Summary:Increased current cash flows and net-present-value savings from accelerated tax depreciation resulting from cost-segregation studies have been discussed in the JofA and other professional literature. But the initial cost-segregation decision can determine later tax side effects, both positive and negative. This article explores some of the tax benefits and drawbacks linked to the use of cost segregation that can materialize in subsequent periods. Cost segregation, or allocating costs or values of a building's components into appropriate classes of personal property to shorten their depreciation recovery period, can be applied to buildings used in a business that were recently constructed, purchased, expanded or remodeled by the taxpayer. The IRS has taken the position that a change in recovery period is a change in accounting method. Cost segregation complicates a subsequent like-kind exchange, because Regs. Sec. 1.1031(j)-1 requires the taxpayer to group multiple properties in exchange groups of like kind or like class.
ISSN:0021-8448
1945-0729