In the CPA world, time is the biggest limiting factor in how much work you can take on, and how much money you can make. Doing an initial recovery period analysis for a cost segregation study can take a lot of time, but it doesn’t have to.
Below, we’ll go into the details of what an initial recovery period analysis is, why you need it for cost segregation studies, and how you can do it much faster with SegStream.
What is an initial recovery period analysis?
The goal of performing a cost segregation study on your property is to break down each component and see what qualifies for an accelerated depreciation period. This is known as an initial recovery period analysis. During this analysis, components are broken down into the following categories:
- Personal property (5 or 7-year depreciation period)
- Land improvements (15-year depreciation period)
- Standard/unimproved property and land (27.5 or 39-year depreciation period)
When you’re performing a cost segregation study, you will determine the value of every component of the property and put it in one of these buckets. For example, on residential property worth $5.75M, you might end up with $1.5M in personal property (5-year depreciation), $700k in land improvements (15-year depreciation), and $3.55M in the standard 27.5-year depreciation period for residential properties. This would result in significant tax savings for your client.
What’s most important about an initial recovery period analysis?
Each of these recovery periods has a particular dollar value associated with it but the relative values of each recovery period are more important than the dollar amount. We can use the percentages of the total property value within each recovery period to look at the relative values. For example, you might end up with:
- 5 Year: 25%
- 15 Year: 10%
- 39 Year: 65%
The “acceptable ranges” of relative value for each different property type are well-known. While these ranges are relatively wide, if a study exceeds the typical range for the property type, it’s more likely they will be flagged for an audit. See the graph below for typical ranges.
If you are doing a cost segregation study on a retail strip shopping center and you reallocate 50% of the property for accelerated depreciation, you’ll likely get flagged for an audit since you’re beyond the acceptable range of 45%. If you get your client audited, the study will receive a lot closer scrutiny and any other mistakes will likely be found. If there are mistakes, your client will need to pay back taxes and penalties. That’s why it’s best to do your absolute best to stay within this range by providing reasonable estimates across the board.
This also applies if you have strangely high values in the 5 or 15-year recovery range. However, if you fall within the low end of the percentage range, you have a lower risk of getting audited.
How is an initial recovery period analysis typically done?
Most CPAs will do an initial recovery period analysis in Excel, which requires going through each component and placing it in one of the different buckets. Then, they can use an Excel formula to calculate the total and allocation percentages. This can be a time-consuming process that requires many calculations and is prone to mistakes, especially when compared to using SegStream Pro.
How SegStream does an initial recovery period analysis faster
Instead of combing through every possible component of your client’s property and placing it into the proper recovery period bucket, SegStream guides you through a question-answering process. Based on your property type, it will prompt you to enter all of the information you need for a complete cost segregation study. Questions will be on items such as materials, dimensions, quantities, and more for each of your building’s possible components.
Then, SegStream will work in the background to automatically sort those components into the proper recovery period based on what you entered. For cost estimates, it will refer to the RSMeans database for the most up-to-date and accurate construction cost information.
This means you’ll only need to gather some details and enter them into a questionnaire, rather than spend many hours breaking everything down yourself. The result is getting your initial recovery period analysis, and full cost segregation study, done much faster.
How do you use your initial recovery period analysis?
Your initial recovery period analysis shows what percentages of your property will be depreciated at an accelerated rate (along with what that rate is). These percentages will go directly to your client’s tax return.
To use your analysis, you will need to produce a cost segregation report. In SegStream, you can simply export an IRS-compliant report directly from the software that your client can use on their tax return. You can also change the report format to match any existing formats you might already have.
Get more cost segregation studies done faster with SegStream
SegStream speeds up the initial recovery period analysis process significantly when compared to using tools like Excel and Access. This allows you to multiply the amount of work that you and your firm can do, and in turn, multiply the number of clients you can take on.
At the same time, it doesn’t reduce the quality of your analysis, and can even increase it since you’re less prone to mistakes from manual work. SegStream was built with the expertise of engineers, architects, and tax pros who have decades of experience—and produces audit-proof studies. You can trust the numbers it crunches for you.