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.
Such property typically will be treated as IRC 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.
Section 1245 property
(subject to recapture of depreciation as ordinary income upon disposition) that is leased or held for leasing,
Buildings and their structural components (with limited exceptions) are not considered Section 1245 property
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
Prior to SBJA 2010, IRC section 179 property included any tangible property to which IRC section 168 applies, or computer software to which IRC section 167 applies, which is IRC section 1245 property
and is acquired by purchase for use in the active conduct of a trade or business.
Cost segregation generally reclassifies section 1250 property as section 1245 property
for depreciation purposes.
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.
This sum is increased by any special basis adjustment described in section 743(b)(1) or [decreased by any special basis adjustment described in section 743(b)(2)] in respect of the property that was reduced, but only to the extent such amount was applied to adjust the amount of the deductions allowed or allowable to the partner for depreciation or amortization of section 1245 property
attributable to the periods referred to in paragraph (a)(2) of regulations section 1.