Countless entrepreneurs are watching their business languish on the vine because they have exhausted traditional funding sources and don’t know where else to turn.
That limited perspective bothers serial start-up entrepreneur Peter J. Burns III, whose company Burn$ Funding has built a discipline around what are called Cost Segregation studies.
What is a Cost Segregation study?
A Cost Segregation study identifies aspects of physical property that can be placed on accelerated depreciation life cycles, potentially resulting in huge tax savings for eligible property owners.
“One of the first questions that comes to mind when I tell a small-business owner about it is, ‘Is it legal?’,” said Burns. “Yes, Cost Segregation is perfectly legal and IRS-compliant. The IRS has even published guidelines for a proper Cost Segregation study on its website. Even better, it is a painlessly easy process for the property owner, with the help of an experienced professional.”
While the modern application of Cost Segregation can be traced most directly to two landmark 1997 court cases, Burns was the first to tie Cost Segregation studies to other business ventures back in 2005, while serving as an adjunct faculty member at the Barrett Honors College at Arizona State University. Partnering with a student enrolled in his entrepreneurship-centric “Ready, Fire, Aim” course, Burns created a marketing company for Cost Segregation studies and managed to generate over $180,000 of profit in only three months. Other opportunities beckoned and Cost Segregation was put on the back burner for the time being.
But not for long. Burns soon devised a number of unique applications for the strategy of Cost Segregation and filed several provisional patent pending applications, one of which centered on charitable fundraising. Burns expanded on this application when he has been invited two years ago to serve as a board member for an entrepreneurial center at a major west coast university. Burns believes every 501c-3 charity could use the technique of Cost Segregation to cost-effectively raise funds from donors, who own eligible property.
Cost Segregation Studies and Their Application for the Small Business Owner
So what is Cost Segregation and how can it be useful in securing growth capital for your business?
Put simply, Cost Segregation is a process through which certified analysts appraise a property and adjust the scheduled depreciation life cycle of non-structural elements like carpets and wall coverings. Since the default tax life on a commercial building is 39 years under standard straight-line depreciation, Cost Segregation professionals seek to identify the myriad pieces of a personal property that can instead be placed on 5, 7, or 15-year depreciation terms.
Such acceleration of depreciation often leads to huge tax savings in the early years of a property’s life and allows property owners to retroactively catch up on any savings that result from the depreciation adjustment. Burns has commissioned hundreds of Cost Segregation studies himself and has observed the rule of thumb that around six percent of the value of a building is given back immediately in tax benefits.
As mentioned above, the entire process is guided by IRS methodology, meaning any CPA should be able to take the results of the Cost Segregation study and safely use it for tax filing purposes. In fact, Cost Segregation should only be performed by experts who are part of the American Society of Cost Segregation Professionals (ASCSP). The ASCSP is the only body in the US that certifies the qualifications of Cost Segregation professionals along with a fully-fledged Code of Ethics.
While the ASCSP provides a directory of Cost Segregation professionals who are members of the organization, as few as five percent of the roughly 91 million eligible buildings have had a Cost Segregation study performed. By Burns’ estimates, that means that there is hundreds of billions of dollars in potential funding being left on the table. That’s one dollar too many, says Burns, who encourages business owners to reach out to him at either of his sites if they want to explore setting up a study.