Two phrases will make any construction project sound more attractive: “Lower taxes” and “improve cash flow.” Because it reduces the depreciable life of a facility investment from 39 years to as little as five, the cost segregation technique could be an attractive option to owners planning to build, remodel, or buy a new facility. The technique allows them to classify a portion of their facility's construction costs as tangible personal property instead of real property. The following portions of the electrical installation are eligible.
Primary and secondary electrical systems — The portion of the electrical load that's allocated to the facility's production equipment.
Branch wiring and special electrical equipment — Power that's used for personal property.
Electrical systems for special communication equipment — Components that are part of the equipment they support.
Lighting — Specialty lighting whose removal wouldn't negatively affect the use of the building.
If the depreciation election isn't qualified, owners could recapture depreciation and risk penalties due to material underpayment of taxes, but a properly prepared engineer's report should provide adequate documentation for tax returns.
