Last Updated on July 31, 2024

Leveraging tax incentives can provide a significant advantage to businesses. Tax incentives are designed to encourage specific business activities, enhance investment and stimulate economic growth. Among the various incentives available, cost segregation and Research & Development (R&D) tax credits stand out as powerful tools for businesses aiming to optimize their financial performance. This post explores these two critical tax incentives, highlighting how they can benefit your business. 

Listen to MyHRBuzz’s Podcast on Cost Segregation and R&D Tax Credits:

Cost Segregation: Accelerating Depreciation for Enhanced Cash Flow 

What is Cost Segregation and How Does It Work? 

Cost segregation is a strategic tax planning tool that allows businesses to accelerate depreciation on certain assets within their property. By breaking down a property’s components into different categories, businesses can depreciate certain assets over shorter periods, rather than the standard 39-year life for commercial properties or 27.5 years for residential properties. 

Cost segregation involves a detailed analysis of a property’s components, including structural elements, landscaping, and personal property. By identifying and reclassifying these components into shorter-lived asset categories—such as 5, 7, or 15 years—businesses can significantly accelerate depreciation deductions. This results in enhanced cash flow and reduced taxable income. 

Benefits of Cost Segregation 

1. Increased Cash Flow: Accelerated depreciation leads to substantial tax savings in the short term, freeing up cash for reinvestment in the business. Bill Mark from Corporate Tax Incentives (CTI) notes that it will show up as a tax deduction, not a tax credit. This means that it will show up on a tax deduction schedule as opposed to a dollar-to-dollar, one-time item. 

2. Tax Deferral: By lowering taxable income, businesses can defer tax liabilities and invest the savings into growth initiatives. 

3. Improved ROI: The increased cash flow can be used for expanding operations, upgrading equipment, or other strategic investments. 

Who Should Consider Cost Segregation? 

Cost segregation is particularly beneficial for businesses that own or lease commercial real estate. This includes office buildings, manufacturing facilities, and retail centers. It is also advantageous for property owners who have recently acquired, renovated, or constructed properties. 

According to Mark, cost-segregation studies should be considered if a business has a basis of at least one million dollars and knows it is something that they would like to hold onto long-term. He also mentioned that there are some key considerations that need to be taken into account: what type of building is it (to determine the percentage of allocation), and when the property was purchased (to determine the bonus depreciation rate).  

R&D Tax Credits: Rewarding Innovation and Technological Advancement 

What are R&D Tax Credits? 

Research & Development (R&D) tax credits are typically some of the most misunderstood tax credits, according to Carrie Gibson of CTI. These tax credits are incentives designed to encourage businesses to invest in innovation and technological advancement. These credits allow companies to receive a dollar-for-dollar reduction in their tax liability for qualifying research activities and expenditures. 

Qualifying Activities and Expenses 

To qualify for R&D tax credits, businesses must engage in activities that involve the development or improvement of products, processes, or technologies. Eligible activities typically include manufacturing, design, fabrication, architecture, engineering, construction, software and tech.  

Gibson also mentioned that breweries, distilleries and wineries are also great candidates, as well as all facets of engineering, pharma, life sciences and biotech. The industries that can benefit are very broad. But, overall, what you’re looking for are industries that involve companies that are designing, developing, building or producing things. 

Expenses that may qualify for R&D tax credits include wages for employees directly involved in R&D activities, costs of materials and supplies used in research, and expenses related to subcontracted R&D work. 

Benefits of R&D Tax Credits 

1. Tax Savings: Businesses can receive substantial tax credits that directly reduce their tax liabilities, providing a financial boost. 

2. Cash Flow Improvement: The credits can improve cash flow, allowing businesses to reinvest in further research or other critical areas. 

3. Competitive Edge: By investing in R&D, businesses can develop innovative products and services, enhancing their competitive position in the market. What is also interesting about the R&D credit, according to Gibson, is that the credit is not dependent upon a product being a success. 

Strategic Use of Tax Incentives and MyHRConcierge 

Understanding and utilizing tax incentives such as cost segregation and R&D tax credits can provide significant financial benefits for your business. By implementing these strategies, businesses can enhance their cash flow, reduce tax liabilities, and reinvest savings into growth and innovation. It is advisable to consult with tax professionals to determine the best approach for leveraging these incentives and maximizing their potential benefits. 

Taking advantage of these tax incentives not only improves your business’s financial health, but also positions it for long-term success and competitiveness. MyHRConcierge can help you stay up-to-date and knowledgeable when it comes to tax incentives. We can help connect you to expert guidance on navigating tax incentives as an employer and business owner. Contact MyHRConcierge at 855-538-6947 ext.108, ccooley@myhrconcierge.com today. Or, schedule a convenient consultation below: