A family-owned business in central Ohio had placed a six million dollar office building into service in 1994.
Several years after the building had been placed into service, cost segregation, a method of reclassifying building assets that significantly reduced the tax burden of owners of commercial property, became accepted by the IRS. Skoda Minotti determined that the business could reap significant tax benefits by employing this technique.
- By conducting a cost segregation study, Skoda Minotti was able to reclassify various components of the building.
- Following the cost segregation study, it was determined that one million dollars of the original construction cost was determined to be “personal property” as opposed to “real property.”
- Personal property can be depreciated over a much shorter life span (five, seven or 15 years) which significantly reduces a company’s tax burden.
- On the business’s 2005 tax return, Skoda Minotti was able to claim the depreciation from the time that the building had been put into service (1994-2005).
- The business was able to claim $650,000 in depreciation which resulted in a $240,000 tax savings for 2005.
- The owners were concerned, however, that by claiming the depreciation in 2005, the business would not be able to claim those depreciation expenses on its future tax returns, thereby leaving an additional tax burden on family members who would one day run the company.
- Skoda Minotti determined that by placing a portion of the tax savings into an interest-bearing account, the business could withdraw funds to cover the additional tax expenses and have the remaining $160,000 available for distribution as a result of the cost segregation study.
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