When we ask executives if they’re getting the most out of their fixed assets, their answers tend to focus on things like the utilization of real estate or the capacity of manufacturing equipment. Those are important measures, to be sure, but to get the most out of their assets, businesses need to take full advantage of any property’s ability to generate deductions as well as income. That’s where services like fixed asset studies and cost segregation studies can make a significant difference in your after-tax financial position. Both studies aim to correctly classify assets into the categories that will allow a business to recover their costs as quickly as possible under the tax rules.
Fixed asset studies
A fixed asset study is a broad look at the classification of all depreciable assets on the balance sheet. We look for items that may have been misclassified when placed in service to determine if any should be reclassified into categories with shorter lives that will increase current depreciation deductions and recover the costs sooner. Where applicable, these studies may generate additional deductions in current and prior years that could lead to claims for refunds.
Cost segregation studies
Cost segregation is a specialized type of fixed asset review that’s performed on a purchased, major renovation, or newly constructed building. If your business depreciates the full cost of that new building as real estate, it could take as long as 27.5 or even 39 years to get the tax benefit of the related deductions. A cost segregation study examines the component systems within the real estate to determine the cost of items that have shorter depreciable lives. Things like carpeting and wallpaper in offices or process electrical and HVAC in manufacturing plants can be depreciated over much shorter lifespans than the real estate where they are installed, resulting in larger deductions in the earlier years of the assets.
Increased value with current NOL carryback rules
The proper classification of these assets often results in increased depreciation deductions on current and recent tax returns. The Coronavirus Aid, Relief and Economic Security (CARES) Act has made those increased deductions even more attractive for some businesses by allowing businesses to carry back for up to five years net operating losses (NOLs) generated after Dec. 31, 2017, and before Jan. 1, 2021. Businesses that have potential unclaimed depreciation deductions during that period may be able to apply those deductions against income in previous years and generate refunds of income taxes previously paid. (Prior to the CARES Act, losses could only be carried forward to reduce income in future years.) Unless new legislation changes the CARES Act rule, businesses will no longer be able to apply these losses against prior years’ income after the end of calendar year 2020.
To learn more about how a fixed asset or cost segregation study could help your business recover asset costs sooner, please contact your Plante Moran advisor.
