A cost segregation study accelerates depreciation, by classifying Internal Revenue Code (IRC) Section 1250 property costs to IRC Section 1245 property.
For example, if the power from an electrical line generally feeds directly to a main electrical panel and actual equipment or machinery to which the overall electrical system provides power, perhaps a percentage of the cost of the electrical panel can be treated as Section 1245 property.
For example, if the electrical panel feeds process equipment (such as manufacturing machinery), then a portion of the cost should be classified as Section 1245 property.
Specifically, the purpose of section 1245 is to require a taxpayer who enjoyed the tax benefit of ordinary depreciation deductions from section 1245 property (153) to "recapture" the gain attributable to those deductions as ordinary income ("Recapture Income") upon the disposition of such property.
Sequentially, if the disposition of section 1245 property results in recognized gain, section 1245 is then applied to determine the characterization of all or part of such gain as Recapture Income.
For example, assume that a taxpayer acquires section 1245 property with an original basis of $1,000.
Section 1245 property
(subject to recapture of depreciation as ordinary income upon disposition) that is leased or held for leasing,
In addition, a straight-line method election for regular tax and AMT under section 168(g)(7) would eliminate any ACE adjustment on newly acquired section 1245 property
Cost segregation generally reclassifies section 1250 property as section 1245 property for depreciation purposes.
Since the section 1245 property in the relinquished property still is valued at $l million, Brown typically would pay no tax on the exchange.
But, having Liberty Zone leasehold improvements eligible for a 5-year recovery does not preclude the taxpayer from conducting a cost segregation study to re-classify certain non-bonus applicable section 1250 property to section 1245 property
so as to take advantage of 5 and 7-year recovery periods.
Upon sale, Section 1245 property
is subject to depreciation recapture at approximately a 40% ordinary income tax rate.