We recently had a contractor do two different projects on our house. The invoice we received had one total price, and I wondered what the breakdown between the two projects was. The purpose of obtaining the breakdown was to satisfy my curiosity, and it had no other impact. But for financial institutions, obtaining the breakdown for work performed could result in a higher tax deduction and lower tax liability. It could identify repairs versus capitalized assets, and certain capitalized assets could qualify for shorter tax lives. The opportunity for savings really depends on the project.
Working with your contractor and other vendors to obtain invoices with the appropriate cost breakdowns for certain assets could result in faster tax depreciation. Knowing which types of assets yield the best benefit is important. The amount of tax depreciation for certain assets is greater because of bonus depreciation and Section 179, which became more favorable under the Tax Cuts and Jobs Act. These rules were discussed in a previous blog by Lindsay Sabelko.
But what about a large project, such as a remodel, new building construction, or building acquisition? The opportunity to maximize the tax deduction is greater in these cases, so financial institutions should consider having a cost segregation study done to maximize their tax savings.
A cost segregation study (allowed by tax law) is essentially an engineering study which determines separate values for each component of a project using an approved pricing methodology. Because financial institutions are in the service industry and have institution-specific property, several components of a building will have shorter personal property lives. This personal property is eligible for bonus depreciation, which is currently a tax deduction of 100% of the eligible costs. In addition, in a remodel, qualified improvement property is eligible for Section 179 expensing (subject to limitations). Before performing a cost segregation study, Wipfli evaluates the cost versus the benefit. The benefit depends largely on the total cost and size of the building. Often, costs under $1 million are better suited for the invoice specification approach for components that are feasibly separable.
If you have big projects under way or planned for, contact your Wipfli advisor to ensure you get the most cost-effective results.