How does cost segregation affect tax shields and early cash flow?

• A. Accelerates depreciation on all assets.
• B. Accelerates depreciation on certain components, increasing early tax shields.
• C. Eliminates depreciation.
• D. No effect.

Answer: (B)

Cost segregation speeds up the tax write‑offs by separating a property's cost into components that have shorter depreciation lives than the building itself. By reclassifying items such as interior finishes, fixtures, equipment, and certain land improvements, you create larger depreciation deductions in the early years. Those bigger early deductions boost the tax shield in those years, lowering taxes and boosting after‑tax cash flow sooner rather than later. Over the asset’s life, total depreciation can stay the same, but the timing shifts toward earlier years, which is especially valuable if current tax rates are higher than future ones. It’s not applied to all assets (land isn’t depreciable and not every component qualifies), and it doesn’t eliminate depreciation; it changes how much you depreciate—and when.