Cost segregation in industry
Industrial investments most often consist of more or less interrelated devices, installations, structures or buildings. For tax and accounting purposes, all investment expenses should be settled into individual fixed assets (as part of the so-called cost segregation ). In addition to the accounting order, as a result of cost segregation, investors can gain tangible benefits, especially in the area of tax.
Professional cost segregation is based on tax, accounting and technical aspects (including under an inspection of the investment) in order to determine the list of fixed assets concerning the investment along with their initial values (calculated on the basis of hard costs as well as costs indirectly related to the investment, e.g. debt financing costs).
Professional cost segregation allows investors to apply differentiated depreciation rates to specific components of the investment. As a result, the sometimes encountered simplifications consisting in presenting the entire investment or a significant part of it as one fixed asset depreciated at a low rate (especially for buildings) are eliminated. The investor may therefore be able to make higher depreciation write-offs.
Cost segregation is also an important tool for savings in property tax. As a result of the technical and legal analysis of the investment, every particular element of the investment can be separated, including in line with the property tax criteria. In many cases, such taxation does not apply to technical parts of devices or to components located inside buildings. The lack of a proper separation of these elements generally causes an unnecessary overstatement of the tax base for property tax.
Cost segregation results also in a lower tax base for the purposes of income tax on buildings. This applies to investments which include a building intended for rent (e.g. commercial warehouses). As consequence of cost segregation, some installations and internal components are presented as separate fixed assets what leads to reduction of the initial value of the building, on which the tax is calculated.
Rafał Kran Tax advisor, manager at MDDP
Last Updated on January 20, 2021 by Karolina Ampulska