Cost Segregation Cost vs Savings: Evaluating ROI

The cost segregation cost vs savings framework compares the study fee to the incremental tax benefit generated by accelerated depreciation. The difference between the two represents the net economic benefit, which determines whether the investment makes sense.

A simple version of the framework calculates first year incremental depreciation, multiplies by marginal tax rate to estimate savings, subtracts the study fee, and evaluates whether the net result justifies the effort and risk.

A more complete framework adjusts for timing, deduction usage limitations, reinvestment assumptions, and sensitivity to changes in bonus depreciation rules or tax rates. The goal is to understand not just whether ROI is positive but whether it is sufficiently attractive relative to alternatives.

Cost segregation study fees vary by provider, property size, complexity, and service level. Understanding typical fee structures helps set expectations and evaluate whether a quoted fee is reasonable for your property.

Common fee structure patterns

• Percentage of basis: Fees typically range from 0.5% to 2% of depreciable basis, with smaller properties at the higher end and larger properties benefiting from economies of scale.
• Fixed minimum: Many providers have a minimum fee ranging from $5,000 to $10,000, which affects the viability of smaller properties.
• Flat fee tiers: Some providers use tiered pricing based on property value bands, such as $7,500 for properties under $2 million, $12,500 for $2 million to $5 million, and so on.
• Complexity adjustments: Properties with extensive improvements, multiple buildings, or unique features may incur higher fees regardless of value.

Fee structure transparency matters. Providers should clearly explain what is included in the fee, any additional costs, and how scope changes affect pricing.

Expected savings depend on depreciable basis, reclassification percentage, bonus depreciation rules, and marginal tax rate. The following scenarios illustrate typical ranges.

These examples assume moderate to high component mixes and ability to use all deductions in year one. Without bonus depreciation or with limited components, savings decrease materially.

The fee vs benefit ratio expresses the relationship between study cost and tax savings. A ratio of 1:10 means that for every dollar spent on the study, ten dollars of tax savings are realized in year one.

Typical ratios range from 1:5 to 1:30 depending on property characteristics and market conditions. Higher ratios indicate stronger ROI and more compelling investment cases.

ROI multiples express the total return relative to the study cost. A 10x ROI means the net benefit is ten times the fee. Payback period measures how quickly the study pays for itself, typically within the first tax year for most viable studies.

Strong payback periods indicate that the study cost is recovered quickly through tax savings, which improves cash flow and reduces risk. Longer payback periods may occur when deduction usage is delayed due to passive activity limits or insufficient income.

For a detailed framework on evaluating payback timing, see cost segregation break even analysis.

Cost can exceed savings in several scenarios, all of which should be evaluated before commissioning a study. Understanding these risk factors helps avoid investments that produce negative ROI.

Common scenarios where cost may exceed savings

• Property has minimal eligible components, producing low reclassification percentages.
• Bonus depreciation has phased down or sunset, reducing first year deduction amounts.
• Study fee is high relative to property value, consuming too much of the benefit.
• Owner cannot use deductions due to passive activity limits or low taxable income.
• Property is sold shortly after the study, limiting the timeframe to realize benefits.
• Marginal tax rate is low, reducing the dollar value of each deduction.

To avoid negative outcomes, model assumptions conservatively and obtain preliminary estimates from providers before committing to a full study.

Deciding whether to proceed with a cost segregation study requires evaluating multiple factors beyond simple cost vs savings arithmetic. A disciplined decision framework improves outcomes.

Key decision criteria

• Net benefit threshold: First year net benefit should exceed the study fee by at least 5x to 10x for a compelling case.
• Deduction usability: Confirm you can use the deductions immediately or within a reasonable timeframe.
• Reinvestment opportunity: Assess whether the incremental cash flow can be productively deployed.
• Documentation quality: Ensure the provider offers defensible engineering support and IRS compliant reporting.
• Holding period: Longer holds provide more time to realize benefits and reduce sensitivity to disposition timing.
• Sensitivity analysis: Model downside scenarios to understand risk if assumptions change.

When comparing provider quotes, evaluate total value delivered rather than focusing solely on the lowest fee. A cheap study with poor documentation can create audit risk and reduce net benefit.

What to compare across providers

• Fee structure and what is included in the quoted price.
• Credentials, experience, and engineering qualifications.
• Scope of work, including site visit, detailed engineering, and reporting format.
• Audit support and defensibility track record.
• Timeline for completion and implementation assistance.
• References and client testimonials for similar property types.

The best value often comes from mid tier providers who balance competitive fees with strong engineering and documentation quality. For more context on how savings vary, see average savings benchmarks by property type.