The cost segregation process can be performed on almost any type of building. By reclassifying commercial assets into shorter MACRS class-lives, cost segregation accelerates depreciation, increases cash flow, and reduces the overall tax burden in virtually every situation. However, due to the highly specialized nature of industrial facilities, these types of properties are among the best candidates for a successful cost segregation study. The high level of customization required in a manufacturing or distributing facility results in a large amount of acceleratable assets. Electrical runs to machines, thicker concrete slabs, reinforced flooring, and dedicated specialized HVAC systems are all examples of assets commonly found in industrial facilities that can be reallocated to shorter class lives. The rapidly evolving technology of certain industries results in a need for frequent facility upgrades and renovation. This constant turnover also contributes to the utility of cost segregation in the industrial sector, as engineers can identify and remove “ghost assets” from depreciation schedules, often writing off the remaining depreciable balance of the replaced asset via partial asset disposition. Many facility owners are under the mistaken impression that a cost segregation study must be performed in the year the facility was constructed or acquired. While it is certainly wise to perform a study in year one, if possible, “look-back” studies can be performed on any facility placed in service since 1987, and the resulting “catch-up” depreciation may be tremendous. Industrial facility components are initially classified as 39-year assets. In a typical cost segregation study, the Capstan team is able to accelerate anywhere between 5-50% into 7-year and 10-15% into 15-year (land improvements.) The variability in the range is due to the variability in the industry. Some facilities have a tremendous amount of infrastructure supporting special purpose equipment – refrigerated warehouses, food processors, clean rooms, laboratories, data centers -- and this results in an extremely successful study. Some facilities in other sectors may not be as specialized, which impacts how much acceleration is possible. For example, consider Manufacturing Facility XYZ, acquired and placed-in-service 6/1/16 at a cost of $15M. After deducting 20% of the acquisition costs to account for land, the property basis became $12M. Cost segregation engineers were able to accelerate 1% to 5-year, 20% to 7-year, and 12% to 15-year, resulting in an additional first year cash flow of $153,551, and a 10 Year Net Present value (NPV) of $921,250. If Facility XYZ had been newly constructed in 2016, it would have been eligible for Bonus Depreciation, and the results would have been even better, with an additional first year cash flow of $857,759 and a 10 Year Net Present value (NPV) of $1,090,620. The highly specialized and rapidly evolving nature of the industrial sector makes it a perfect source of candidates for cost segregation and related studies.
Terri S. Johnson, CRE, is a co-founder and managing partner at Capstan Tax Strategies.