Explaining Cost Segregation Studies

Saving money on taxes can mean using some creative methods. One of these methods in California is a cost segregation study (CSS), which is a detailed analysis of your business’s assets that identifies items that can be untangled from real property. The primary purpose of a CSS, also referred to as an accelerated depreciation study, is to find components of real property, or related personal property, that may have a much shorter depreciation time than the real property itself.  

Usually, real property itself has a depreciation time of 27.5 or 39 years, depending on several factors. Using this fixed-asset system results in a straight line depreciation method. However, if a CSS identifies personal property that is considered a part of the real property when depreciated, then businesses can depreciate these parts of property in five, 10, or 15 years. This is laid out in the IRS’ Section 1245.

What Can a CSS Identify as Having a Shorter Depreciation Time?

The federal tax code designates personal property and land improvement as eligible for shorter depreciation times. These are non-structural parts of a piece of real property. Examples include a building’s carpeting, parts of the electrical system, landscaping (which can have its own distinct designations), dumpster barriers, fences, and many other examples. Generally, indirect construction costs and improvements to the exterior land are included. 

How Can You Use Cost Segregation Studies to Reduce Your Taxable Income?

The obvious benefit of cost segregation studies is that business owners can dramatically increase their depreciation expenses over the first five years after purchasing or building something. When tax payment amounts go down as a result of this accelerated depreciation, this frees up cash for other investments and ventures that can grow your business. 

Example of a CSS

Let’s say you recently constructed a piece of real estate for $1.5 million. In the absence of a CSS, you enter into a 39-year fixed-asset system for depreciation and realize $120,000 worth of depreciation expenses over the next five years. If you had ordered a CSS at the outset, though, a thorough examination of your building and engineering reports would have revealed that you could have realized a depreciation expense of $300,000 in the same time frame. This extra $180,000 of depreciation is a form of tax deduction to decrease your taxable income during those five years. You can use that money to improve the real property, or invest in your business if your business pays you rent for using the real property. 


If you have constructed, purchased, or remodeled a piece of real property since 1987, you should consider using a CSS to identify ways in which you may realize tax savings. Attorney Tyler Q. Dahl is one of fewer than 100 attorneys across the country who is also a Certified Tax Coach, uniquely qualifying the firm to help you save taxes while also ensuring compliance with federal and state agencies. Give us a call today at 916-545-2790 to see how we can help.

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