Manufacturers: Uncover Substantial Tax Advantages with a Cost Segregation Study

Understanding Depreciation and Its Impact

Assets with a lifespan exceeding one year require depreciation, spreading the cost over several years. Depreciation periods vary based on the property type. Tangible personal property, like machinery, enjoys shorter depreciation periods (3, 5, or 7 years) compared to commercial buildings like manufacturing facilities (39 years).

Fortunately, a portion of your facility’s components might qualify as tangible personal property if they directly support your manufacturing operations. These components traditionally include electrical and HVAC systems, roofing, plumbing fixtures, and flooring. In the manufacturing industry, the list expands to include conveyor belts, service bay doors, workstations, trash enclosures, and even robotic machinery.

How a Cost Segregation Study Optimizes Your Taxes

Since depreciation periods depend on a building’s specific use, manufacturers leverage cost segregation studies. This process combines engineering and accounting expertise to identify building costs attributable to tangible personal property rather than real estate. While the cost-benefit analysis is specific to each company, a cost segregation study can be a worthwhile investment.

Benefits of a Cost Segregation Study for Manufacturers

• Accelerated Depreciation: The study can reclassify specific building components, allowing for faster depreciation deductions, reducing your tax burden and boosting cash flow.
• Identification of Additional Tax Advantages: Beyond personal property classification, the study can identify qualified improvement property (QIP) and land improvements with shorter depreciation periods.
• Leveraging Tax Breaks: The study can position you to benefit from Section 179 expensing, permitting you to expense up to $1.22 million of qualified property costs in 2024 (indexed annually for inflation). This can include roofs, HVAC systems, fire protection systems, and security systems that meet specific criteria. Additionally, you might qualify for first-year bonus depreciation, currently at 60% for 2024 (gradually decreasing in subsequent years).

Is a Cost Segregation Study Right for Your Manufacturing Business?

The cost-effectiveness of a cost segregation study depends on your unique circumstances. However, the potential for significant tax savings through accelerated depreciation and valuable tax breaks makes it a compelling option for many manufacturers.