Martin Harski, who has offered cost-segregation services here for more than three decades, is expanding dramatically the geographical area he serves.

The former owner of Spokane-based Cost Segregation Company Inc. has joined a newly formed cost segregation division of Jack Jaffa & Associates, a large New York-based real estate consulting firm. He'll now divide his time between Spokane and New York as director of that division, with plans eventually to open specialty offices nationwide.

Cost segregation is a niche accounting service most often applied to identify certain assets within a commercial property—such as decor and carpeting in a hotel—that can qualify under shorter depreciation schedules than the building itself for accelerated tax savings.

Cost segregation can allow the property owner to take larger tax deductions for some parts of a building reclassified with five-, seven-, or 15-year depreciation, rather than simply spread out over a commercial structure's standard 39-year tax depreciation. Examples of assets include landscaping, light fixtures and some electrical wiring, paving, flooring, and cabinets.

The allowances under U.S. tax laws also are in place for shorter lifespan components of residential rental properties that have a core structure depreciation period of 27 1/2 years.

In Spokane, Harski works out of fifth-floor offices of a building at 201 W. North River Drive, just north of downtown Spokane, with two full-time construction estimators and one part-time administrator.

"We identify the shorter-life assets within a building," Harski says, asserting that the accelerated tax savings increase a business owner's cash flow, which can be reinvested in renovations or other properties. "The biggest thing about cost segregation is when someone buys a building, nine times out of 10, the accountant doesn't know all the component depreciation items within a building."

He adds, "Many accountants tend to look at two components only, the land value and the building value. They don't accelerate depreciation on components. They don't know the value of the carpet or other components. The majority of accountants don't separate out the costs to this day still."

Harski says Internal Revenue Service rulings and procedures have allowed taxpayers to change accounting methods for cost segregation to apply to commercial or rental property purchased, constructed, expanded or remodeled since 1987, without amending tax returns. His clients include owners of large shopping centers, hotels, restaurants, casinos, banks, rental units, nursing homes, and manufacturing facilities.

Harski says the Jack Jaffa division charges a flat fee of between $5,000 and $200,000 for a cost segregation study, depending on the type of property and how many buildings and tenants are involved. Some larger accounting firms in Spokane, including the offices of Moss Adams LLP and CliftonLarsonAllen, also offer cost segregation services, he says.

Although cost segregation services are somewhat akin to real estate appraisals, Harski says the detailed cost analysis reports he and his co-workers produce are construction- and engineering-based and require multiple steps in addition to a site visit. The process includes a review of real estate documents, architectural drawings, appraisal reports, blueprints from any renovations, and assessor records. Additionally, the office uses computer software and photography to prepare the reports.

Site visits are required for cost segregation studies under IRS rules, Harski adds, so he often flies all over the U.S. for evaluations that can last from an hour to two days at a property site.

"We go in and count the number of lights, the feet of conduit and wiring," Harski says in giving examples. "We're dissecting a building in much greater detail than an appraiser does."

Harski says cost segregation can benefit any property owner, from a mom-and-pop business that rents duplexes to the most sophisticated Fortune 500 companies.

"The accelerated depreciation expense offsets your income that you pay taxes on," he says. "If I can reduce your taxable income, that's increasing your cash flow because you're not paying out more taxes."

One example he gives is a client that purchased a shopping center for $14.5 million. Initially, accountants didn't allocate any of the short-life assets in the center into shorter depreciable tax lives and treated the entire project cost as a 39-year property, Harski says.

He says a subsequent cost segregation study he performed identified those assets, and the client used shorter depreciation schedules on them to realize more than $2.1 million in tax savings over the first six years.

Harski isn't a certified public accountant but has a longtime background in accounting, construction, and appraisal work. He was a carpenter and electrician for about two years after serving in the U.S. Air Force. As a youth, he spent time helping his father, who was an appraiser.

Prior to his 12 years operating the Cost Segregation Group here, Harski spent about three years working at the Moss Adams accounting firm in Spokane, and prior to that, 10 years with the accounting firm BDO Seidman, in Milwaukee.

Harski first began studying cost segregation in 1980.

"Cost segregation has been around since the 1960s, and then it was called component depreciation," he says.

He adds that through the years, federal tax rules affecting the concept have changed, including a major shift in the mid-1980s, but current cost segregation falls under tax rules implemented in the 1990s that allow the five-, seven-, or 15-year depreciable tax life for shorter-life assets within a real estate portfolio.

Harski says one concern in the industry is the potential for provisions of so-called Bush-era tax rules to end this year that allow for additional tax benefits for bonus depreciation on building renovations and for qualified leaseholder improvements. If these rules aren't renewed, "it will make cost segregation even more valuable because it would be the only thing left to identify various components of a building," Harski adds.

Harski says his move over to the Jack Jaffa division has opened up more than 5,000 potential clients for cost segregation services, and he plans to hire one to three people in the next year. Currently, he says he's not sure whether those people would be based in Spokane or New York.