How To Report Cost Segregation On Your Tax Return

You’ve decided to cash in on accelerated depreciation with cost segregation, but what are your next steps once the study is complete? How you claim this depreciation varies based on whether the study was completed the same year you purchased the property or if you had a look-back study performed later.

In this post, we’ll break down how to report cost segregation on a tax return, as well as outline the benefits of hiring a professional to handle the numbers for you.

And if you haven’t gotten a cost segregation study, what are you waiting for? If you own commercial or investment property, you could save thousands of dollars with accelerated and bonus depreciation following a cost segregation study. Learn more about how to do a cost segregation study, and get started today with one of the best cost segregation companies.

How To Report Cost Segregation In The Year The Property Is Purchased

If the cost segregation study was completed the same year the property was put into service, you can report accelerated depreciation using IRS Form 4562, Depreciation and Amortization. This form will be submitted with your federal income tax return.

On this form, you will need to provide information related to depreciation elections, including:

• Depreciation for Section 179 property
• Bonus depreciation for qualified property for its first year in service
• Modified Accelerated Cost Recovery System (MACRS) depreciation
• Listed property (i.e., automobiles, property used for entertainment, etc.)

The information needed for MACRS depreciation will be found in your cost segregation study on the Cost Detail and Cost Summary pages.

In addition to this form, you will also need to submit a copy of your cost segregation study with your tax return.

Bonus depreciation is generally applied by default to qualifying property. However, taxpayers may elect out or apply alternative treatment by making the appropriate elections on their tax return and attaching a statement to Form 4562.

Recent IRS guidance also introduced additional flexibility for certain tax years, allowing taxpayers to elect reduced bonus depreciation rates for qualifying property instead of taking the full 100% first-year deduction.

In some cases, taxpayers may also apply bonus depreciation selectively to qualifying components identified in a cost segregation study, rather than treating the entire property uniformly.

Depending on the property type, additional elections may apply for certain assets or improvements, which can impact how depreciation is reported and claimed.

How To Report Cost Segregation For Property Purchased Before The Current Tax Year

If a cost segregation study was completed in a tax year after the property was purchased, you can report cost segregation using IRS Form 3115, Application for Change in Accounting Method. You will not be required to file an amended return to claim depreciation for previous years.

Form 3115 is quite lengthy, but fortunately, you won’t have to complete every section if you’re only reporting cost segregation for a property that was placed in service before the current tax year. Here’s a general overview of what to expect when filling out Form 3115.

When To Hire An Expert For Cost Segregation Taxes

Cost segregation can be tricky, and if you don’t have prior tax experience, making sure everything is reported accurately is a challenge. These inaccuracies aren’t just little mistakes, either — failing to file the correct forms or making an error can result in penalties and fees that add up quickly.

For this reason, we recommend hiring a tax preparer or accountant to handle the paperwork for you. Not only will an experienced professional handle the time-consuming task of completing and filing your tax forms, but they can also guide you to additional tax credits and benefits you may be eligible to receive. You may also receive additional benefits such as audit protection.

At the very least, we recommend using tax software, which can walk you step-by-step through the tax prep and filing process to help you avoid making costly errors. Check out our cost segregation calculator to see how much your business could save with a cost seg study.