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Josh Shipman
Josh Shipman

Practice Owner: Holding a Winning Lottery Ticket But Not Claiming it?

Practice Owner: Holding a Winning Lottery Ticket But Not Claiming it?

6/13/2018 6:19:21 AM   |   Comments: 0   |   Views: 47
You own the property in which your practice operates, yet you are not taking advantage of a significant cash resource. This is like you are holding a winning lottery ticket but not claiming it, only because you did not know it had additional value. I’m referring to a substantial tax benefit which is equivalent to tens, and even hundreds of thousands of dollars. No, I’m not referring to properties owned by Fortune 500 companies. I assure you, they are well informed and pay large accounting firms to get this right.  I am referring to the majority of the small to mid-sized businesses with a commercial property basis of more than $300 thousand but less than $14 Million. 

The lottery ticket I am referring to is your building and the winning combination is cost segregation. Not familiar? That’s okay. Basically, cost segregation offsets a building owner’s tax liability by accelerating depreciation deductions on allowable building components—in addition to those typically identified by your tax professional. The additional tax benefit is usually 5-10% of the building’s basis—so $50-$100K per $1M. Now, the money otherwise paid in tax may be retained, invested in the business, or used to pay down principle, etc.

 Similar to winning the lottery you may choose to take your winnings in an annuity or as a lump sum. However, unlike the lottery, choosing the lump sum does not reduce your payout, and more importantly it reduces your tax liability rather than increasing it. Still following me?   


To be clear, Cost Segregation does not create new deductions it simply allows you to accelerate depreciation on non-structural components, thus lowering near-term tax liabilities.  You still have the remaining structural deductions to offset future taxes. For most of you, your property generally depreciates over 39 years, so why are you placing specialized, non-structural components on the same schedule— especially when the usable life of these systems are only 1, 5, 7, or 15 years? Now consider if you move or need to replace one of these components in the next 10 years. Oops!

The next and most important aspect of accelerated depreciation is the time value of money. This is the basic principle that any amount of money today is worth more than the same amount in the future. For example, this year your business takes a $10,000 tax benefit and invests it at 7% interest, the company will have $10,700 at the end of the year. Thus, waiting a year for $10,700 is comparable to the present value of $10,000. So tell me, why would you have the government to hold your money without the benefit of interest?   

When does this not apply? Great question! First, cost segregation does not apply if you do not owe taxes (i.e. you don’t have tax to offset). Second, if the building is close to half, much less fully depreciated (i.e. you’ve owned the building 39 years therefore there is nothing to depreciate). Third, you plan on flipping the asset in less than five years. However, if you acquired and renovated the property, more than likely you will also miss out on other things like partial asset disposition—literally throwing money in the trash. Finally, some tax professionals will claim that you can’t apply cost segregation if the building is in an LLC separate from the business. Maybe, maybe not. This depends on several things including when the LLC was established and if the building is part of an economic unit which may be grouped for tax purposes? This is why you need someone specializing in tangible property regulations and not simply tax preparation. 

 So… should your tax professional say “it’s really not that big of a deal,” you can then ask them if it’s okay to pay their fee over the next 39 years. The amount of value is relative. If you don’t know what that value is, I suggest you find out. The best way to do this is request an estimate from a reputable engineering-based cost segregation firm. Then you will have real numbers to discuss with your tax professional. What do you have to lose? It’s only your money.
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