What is a Cost Segregation Study?
A cost segregation study provides an opportunity for many craft breweries and distilleries that have constructed, purchased, or substantially improved their new or used buildings and real estate assets, to take advantage of accelerated depreciation deductions and defer federal and state income taxes.
For a craft brewery or distillery, depreciation generally involves expensing the initial investment in capital equipment and build out into three categories: 5-year property, 15-year property and 39-year property.
The reclassification of property, plant and equipment from a longer depreciable life to a shorter depreciable life frequently allows such assets to become eligible for 100% bonus depreciation, which commonly results in additional tax savings and improved cash flows.
A recent study conducted by a professional in the industry showed that the percentage of 5-year property and 15-year property contained in many craft breweries and distilleries is between 30 – 50 percent. This potentially means that many assets within the building component itself can qualify for accelerated depreciation methods.
How are Cost Segregation Studies Conducted?
Cost segregation studies are conducted through a detailed and systematic accounting- and engineering-based analysis that is designed to identify and segregate the costs of short-lived property from the costs of real property.
Are Cost Segregation Studies Different After the 2017 Tax Reform?
Cost segregation considerations are more advantageous than ever before as a result of the changes that were made to depreciation methods with the passing of the Tax Cuts and Jobs Act.
Prior to the passing of the Tax Cuts and Jobs Act, bonus depreciation was available to craft breweries and distilleries for new assets only with a depreciable period of 20 years or less at an accelerated rate in the assets’ first year of service.
This meant that craft brewery and distillery owners of used buildings were not eligible for bonus depreciation and were less motivated by the benefits of a cost segregation study.
Under the Tax Cuts and Jobs Act, new and used qualifying assets that have a tax depreciable period of 20 years or less are now eligible for the 100 percent bonus depreciation provision in the assets’ first year of service.
This minor change in the tax law immediately created an opportunity for major tax savings that can be reinvested back into the operations of craft breweries and distilleries.
What are the Tax Benefits of Cost Segregation Studies?
When it comes to real estate construction, acquisition, expansion, or a remodel, the underlying benefit of a cost segregation study is that it produces enhanced depreciation deductions.
However, the main benefit of a cost segregation study is not simply concerning more depreciation deductions, but concerning the time value of money. The advantages of these accelerated deductions will be quantifiably greater than had the deductions been spread over longer periods of time using less accelerated depreciation methods.
A second tax benefit of cost segregation studies is that such studies frequently create a well-documented audit trail. If a cost segregation study is documented well, it can alleviate the possibility of an unfavorable audit adjustment due to improper documentation. Owners of craft breweries and distilleries will normally experience success under an IRS examination in sustaining accelerated depreciation deductions if such benefits are supported by an accurate cost segregation study that is based on contemporaneous records.
Another benefit of cost segregation studies is that if a component of a structure needs repair or replacement at some future date then owners of craft breweries and distilleries can identity and adjust off its remaining basis. This detailed method of record keeping allows owners of craft breweries and distilleries to potentially deduct a loss on disposition compared to no loss being recognized if the cost of the building component were interwoven with the cost of the building itself.
Cost segregation studies can also potentially lower local real estate and realty-transfer taxes. Local real estate and realty-transfer taxes are often calculated and determined by local governments based on the property’s fair market value. With this being said, if a cost segregation study results in a decreased fair market value, this may generate a lower amount owed for local real estate and realty-transfer taxes.
Do Cost Segregation Studies Apply Retroactively?
Cost segregation studies are generally most beneficial for recently completed construction, but they can often generate retroactive tax deductions for older buildings.
Craft breweries and distilleries that have not previously conducted a cost segregation study for their businesses should consider doing so in order to capitalize on any missed opportunities through depreciation catch-up techniques that will often generate a substantial reduction of the current year tax liability.
Moving Forward to Initiate Cost Segregation Studies for Craft Breweries and Distilleries
Every craft brewery and distillery is unique, and each has different needs. The best way to effectively position your craft brewery or distillery with the benefits of a cost segregation study is to partner with a tax advisor who understands your industry and tax law.