How cost segregation can save your client's money.

What if you could approach your clients and tell them you are going to save them money? Architects and engineers possess the ability to save their clients money. Sadly, not all of them are armed with the requisite knowledge, yet it is already incorporated into their designs and the only task that remains is to point out money saving opportunities.

Typically, when a client completes a project build-out, it has to "hit the books" and depreciate. However, neither the client nor the accountant has detailed knowledge of construction, so in accordance with the Internal Revenue Service regulations, they depreciate the total project cost based on 39 years.

However, the IRS allows for five-, seven- and 15-year depreciation for certain project costs, including carpeting, cabinetry and landscaping, among others. This is called cost segregation.

A cost segregation study is an IRS-accepted methodology to identify, separate and reclassify project related costs to shorter, accelerated life than that required for the building itself. Theses assets are considered by the IRS as personal property rather than real property. Architects and engineers, working in association with cost segregation specialists, can pinpoint costs associated with items of personal property to the owner so that they can be depreciated on a faster schedule.

Some examples that may qualify for accelerated depreciation include architectural design elements that are decorative, non-structural and serve no function to the operation and maintenance of the building, engineering HVAC designs that maintain temperature and humidity requirements for machinery and kitchen and pantry designs. In addition, the more specialized the build-out, i.e. restaurant, showroom or disaster recovery center, the greater the potential savings.

Cost segregation is minimally invasive to the overall construction project. With careful documentation of design objectives, design calculations and cost estimates for items that qualify as personal property, the architect can present the project budget to the owner and the accountants at the end of the project.

With costs correctly classified as items of personal property or real property, the accountant can make the correct entries into the tax books and realize savings in the form of lower tax liabilities, thereby increasing cash flow in the near term. A $10 million project may actually cost $9.4 million after the costs are properly segregated.

Cost segregation analysis requires not only knowledge in design/ construction, but in federal tax depreciation regulations as well. It is driven by the Internal Revenue Code and supported by Letter Rulings and Decisions in Tax Courts, so it is constantly evolving.

Cost segregation may reduce the overall construction project cost by up to 8%. Few architects are aware of this. Introducing this technique to a potential client may set you apart from your colleagues and win you the next design contract.