A properly designed and implemented construction tax planning analysis will proactively identify tax savings related to new and planned construction projects.
A construction tax planning analysis should not be confused with a cost segregation analysis. A cost segregation analysis will methodically review property, plant and equipment and properly reclassify real property into personal property and land improvements by reviewing all of the structural components within the building structure, such as the roof and windows, and building systems such as lighting and plumbing. In general, floor plans and blueprints are meticulously reviewed and site inspections are conducted to review the building envelope in order to ensure sustainable tax positions in accordance with Circular 230.
In contrast, a construction tax planning analysis utilizes a proactive “pre-design phase” methodology for identifying, gathering and documenting additional tax savings related to new and planned construction projects, whether they’re in connection with constructing a new building, adding a new wing to an existing building, or renovating a single floor within an existing building.
Construction tax planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the “construction phase” to ensure the structural components will be classified as personal property as opposed to real property. That could include requesting a contractor to use modular internal walls to bifurcate office and conference room space in a commercial office building, as opposed to permanently affixing the internal walls to bifurcate space within the floor configuration layout so the structural components can be classified as personal property with a five-year depreciable class life instead of real property with a 39-year depreciable class life.
In addition, Form 3115 is never filed, as construction tax planning is considered proactive, and not reactive, planning. Thus, there is no need to reclassify asset classifications, as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk, as an accounting method change never occurred, and consequently Form 3115 is not filed. Accounting method changes only occur when a transaction is treated a certain way on a tax return— regardless of whether it was treated correctly or incorrectly— for a period of two years or more.
By combining cost segregation analysis with the principles of construction tax planning and abandonment deduction planning, in accordance with the Treasury Department’s tangible property regulations (such as the retirement or abandonment of structural components within the building envelope before they have been fully depreciated over their asset class life for tax purposes), you can optimize the true value of a comprehensive fixed asset analysis.