Featured Services

Cost Segregation Study


What are the relevant code (IRC) sections which allow for the depreciation?

 

Section 263A: This is the Internal Revenue Code section mandating that various components of the building and other direct or indirect costs be included in the total cost of a building. Cost segregation studies can better help determine what goes into the cost basis of a building for future accelerated depreciation. This is especially helpful for new purchases of buildings. Without these costs, a property owner might not understand the total depreciable value of the building. From the example above, the electrical wiring would be an example of a 263A cost. Direct costs are materials, labor, and contractor expenses to make various items (water and sewer lines, electrical systems, paving and curbs, fencing and security features, site signage and lighting, and outdoor recreational amenities, esp as part of a development or RV park). Indirect costs are things like design fees, engineering costs, construction supervision, purchasing, and certain overhead expenses. But a word of caution: certain expenses do not qualify (marketing, selling, unrelated admin costs) and should be expensed separately and not part of the building purchase.
 

Depreciation Provisions:

  • Section 167: General depreciation
     
  • Section 168: Modified Accelerated Cost Recovery System (MACRS) for various recovery periods (5, 7, 15, 27.5, or 39 years). BONUS Depreciation is under Section 168(k), allowing for 100% depreciation (immediate full write-off). See OBBA section below.
     
  • Section 1245: Tangible personal property (e.g., equipment, furniture, certain fixtures, all with a typical 5- to 7-year life)
     
  • Section 1250: Depreciation for the building, i.e., the “shell” and structural components, depreciated over 27.5 (residential) or 39 (commercial) years.
     
  • Section 179: Another code section which allows for immediate expensing of certain business property, similar to Bonus (168(k)). In case a property does not qualify for Bonus, you could use 179!
     
  • Section 481(a): This is the pièce de résistance! This IRS Code section allows for that one-time large depreciation amount you put on the tax return (corporate or individual tax return) to lower the taxable income. No tax return amendment is needed, as this 481 depreciation adjustment number goes on the current tax return you are filing!