Maximizing Cost Segregations and
Bonus Depreciation in 2008!

Cost Segregation

Low risk, high return. Cost segregation studies provide real dollar savings and increased cash flow to property owners by simply changing how property is depreciated. A cost segregation study is an analysis of your company's new, renovated, or existing building to determine if certain costs, for items such as personal property or land improvements, can be segregated and depreciated over a shorter period. Under current tax law, a building is depreciated over 39 years. Personal property assets and land improvements, however, may be depreciated over 15, 7, 5, or even 3 years, depending on the type of property. A cost segregation study is designed to identify these costs so that they may be depreciated appropriately.

"Bonus" Depreciation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 as a means to bolster the slowing economy and to encourage businesses to buy more capital goods and equipment. The Economic Stimulus Act of 2008 showcases the following notable provisions for tax years beginning in 2008, including an increased "Section 179" deduction of $250,000 as well as reinstituting a "Bonus" depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed into service during 2008. In other words, taxpayers will be able to immediately deduct 50% of the adjusted basis of qualified property. Generally speaking, qualified property will include the following:

• All property placed into service with a recovery period of 20 years or less
• Computer Software
• Leasehold Improvements

Coupling Bonus Depreciation with Cost Segregations

During 2008, taxpayers will be allowed to combine bonus depreciation with cost segregations for any buildings where a contract was signed on or after January 1, 2008 AND the building was completed by December 31, 2008. Even if the building has not been placed into service as of December 31, 2008, bonus depreciation will still be allowed on the percentage of work completed by December 31, 2008. In this situation, the opportunity exists to maximize tax deductions since not only would certain components of the building be broken out into categories that are depreciated over shorter lives (3 yr - 15 year recovery periods), these components would also be eligible for an immediate $250,000 Section 179 deduction and all remaining qualified components would be eligible for 50% "Bonus" depreciation.

Cost segregations do not generate additional tax deductions, but they do in fact accelerate tax expense over a much shorter time span. Due to the time value of money, the advantage of front-loading depreciation deductions is quantifiably greater than if the deductions had been spread over longer periods of time using slower depreciation methods. Cost segregation provides other advantages including possible reduction in real property taxes and the ability to write-off various building components, as they need to be replaced.

In light of the increased tax benefits offered by the Economic Stimulus Act of 2008, an opportunity exists to maximize the low-risk tax savings offered by a cost segregation study. If you are thinking about expanding or building a new facility, consider moving forward now. For more information on whether your company would benefit from a cost segregation study, please contact your PKM consultant.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping homebuilders and real estate developers build profitable businesses. For information, contact Adam Polakov at apolakov@pkm.com or Arvil Stanford at astanford@pkm.com or visit www.pkm.com.