The 13 Must-Have Elements of a Quality Cost Segregation Study
Whether you're a business owner looking to improve your tax situation or a real estate investor looking to maximize your returns, a cost segregation study can provide significant financial benefits. But not all cost segregation studies are created equal and selecting a qualified provider can be a daunting experience for newbies and experienced syndicators alike.
There are many options available on the market today including DIY, computer-modeled, fully engineered, and various combinations in between. While some of these low-cost options may seem affordable and attractive, it's important to keep in mind that the IRS has specific standards for what constitutes a "quality" study. DIY and computer-modeled approaches may not always meet these standards, so it's important to choose a provider that has the expertise and experience to conduct a thorough and accurate study.
While there are no specific regulations for the format of a cost segregation study, the IRS has provided guidelines for what makes a cost segregation study "quality" in their Cost Segregation Audit Techniques Guide (ATG). These guidelines can help businesses conduct an accurate and well-documented study, which can greatly expedite the IRS's review process and minimize the audit burden on all parties. Here we will explore the 13 elements of a quality study including how we work to keep you in full compliance.
These guidelines include the following 13 principal elements:
- Preparation by An Individual with Expertise and Experience: It's crucial to choose a provider for your cost segregation study who has expertise and experience in this area. This ensures that the study is conducted by a qualified and knowledgeable individual who understands the tax laws and regulations related to cost segregation and has the technical expertise to properly analyze the costs of a building. Our managing partner is a CPA and we ONLY use engineers to perform our studies for this reason.
- Detailed Description of The Methodology: A quality cost segregation study should include a detailed description of the methodology used to classify and analyze the costs of the building. This includes the steps taken to identify, classify, and allocate costs, as well as any assumptions or exclusions made in the process. Not all methodologies are equal, we use Replacement Cost New Less Depreciation which is one of the highest standards for a fully engineered study.
- Use of Appropriate Documentation: In order to accurately classify and analyze the costs of a building, it's important to have detailed and reliable documentation. The IRS also recommends a site visit as part of this documentation. A quality cost segregation study should make use of this documentation and site visit in order to provide a comprehensive and accurate analysis. We ask all our clients for this documentation when they onboard and perform the majority of our site visits virtually in order to visit your property quickly and easily.
- Interviews Conducted with Appropriate Parties: In addition to reviewing documentation, a quality cost segregation study should also involve conversations with appropriate parties, such as the building's architect, and contractors as needed. These interviews can provide valuable insights and information that can help ensure the accuracy of the study. We make sure we have all the information we need from you and will talk with any other involved parties if needed.
- Use of A Common Nomenclature: A common nomenclature is a standardized system of terms and definitions used to classify and organize assets. Using a common nomenclature helps to ensure consistency and clarity in the classification of assets and can make the study easier to understand and review. Common nomenclature makes it easier to understand our studies - we include a dictionary of terms used in each report.
- Use of A Standard Numbering System: A standard numbering system is a systematic way of assigning unique numbers to each asset in the study. This can help to organize and classify assets and make the study more efficient and easier to review. Ditto for standard numbering - we want to make it easy for people to read our studies.
- Explanation of The Legal Analysis: A quality cost segregation study should provide an explanation of the legal analysis used to classify assets as either § 1245 or § 1250 property. This includes citing relevant tax laws and regulations and explaining the rationale for the classification of each asset. Our team spends time researching relevant legal analysis so that you don’t have to. We include this information in every report.
- Determination of Unit Costs and Engineering "Take-Offs": In order to accurately allocate costs to specific assets, a quality cost segregation study should determine unit costs and engineering "take-offs" for each asset. We break down the costs associated with each component of your building and assign them to the appropriate asset.
- Organization of Assets into Lists or Groups: A quality cost segregation study should organize assets into lists or groups in order to facilitate analysis and review. This can help to make the study more efficient and easier to understand. We organize group assets by their IRS classification in order to make it easier
- Reconciliation of Total Allocated Costs to Total Actual Costs: It's important to ensure that the total allocated costs for each asset in the study match the total actual costs for the building. We always reconcile these totals to ensure accuracy.
- Explanation of The Treatment of Indirect Costs: Indirect costs, such as overhead, are costs that cannot be directly attributed to a specific asset or activity. A quality cost segregation study should explain how these costs have been treated, including any allocation methods used. We are evaluating all of the components of your property to determine which are eligible for accelerated depreciation.
- Identification and Listing of § 1245 Property: § 1245 property refers to personal property or land improvements that can be depreciated over shorter tax lives than the typical 27.5 or 39-year lives for residential or commercial buildings. A quality cost segregation study should identify and list all § 1245 property in the study. This is a key element of our studies. We are evaluating all of the components of your property to determine which are eligible for accelerated depreciation.
- Consideration of Related Aspects: A quality cost segregation study should consider any related aspects that may impact the classification and analysis of assets. This may include I.R.C. § 263A, which relates to the capitalization of certain costs, as well as any changes in accounting method and sampling techniques that may be relevant to the study. We will work with you and your CPA to ensure all related aspects are captured in the study.
As you are evaluating cost segregation providers make sure they are including these 13 key elements in their study. Don't let a subpar study jeopardize your business's tax savings – choose a provider that can deliver a quality cost segregation study that meets IRS standards.
