While cost segregation can be beneficial in many ways, it is not without its downsides. One of the biggest downsides is the potential for recapture. Recapture is the process of having to pay back accelerated depreciation deductions if certain conditions are not met.
Recapture can occur when property is disposed of or changes use before it has been fully depreciated. For example, if a business buys a building for $1 million and elects to use cost segregation to depreciate the building over a shorter period, such as 15 years instead of the standard 27.5 or 39 year periods, and then sells or stops using the building within that 15 year period, the IRS could require the business to pay back some or all of the accelerated depreciation deductions taken in the past.
Another example of recapture would be if the IRS determined that certain assets were misclassified and should not have been depreciated using accelerated rates. In this case, the IRS may require the business to pay back any accelerated depreciation deductions taken in the past.
Finally, the IRS may require recapture if the business no longer meets the requirements of the tax code. For example, if the business is no longer classified as a regular trade or business, the IRS may require the business to pay back any accelerated depreciation deductions taken in the past.
The potential for recapture can be a major concern for businesses considering cost segregation. It is important to consult with a qualified tax professional to determine if cost segregation is right for your business.