COST SEGREGATION

From TaxAlmanac

I would strongly advise readers of postings on this site to read the Cost Segregation Audit Techniques Guide promulgated by the IRS.

There are many unprofessional cost segregation firms that promise incredible tax savings through present value of tax savings calculations in the reclassification of property. However, these savings are often inflated by including FF&E or equipment in the analysis. For example:

If you are constructing a new hotel for $25 million and that cost includes the room and common area furnishings, then you will not reap huge tax savings by having a cost segregation study completed on the $25 million. You recognize benefits on the analysis and proper classification of assets contained in the construction costs. To imply that taxpayers, or their accounting firms would classify the FF&E or equipment in the 39 year building class is a typical ploy used by unprofessional cost segregation firms to beef up the promised tax savings through additional depreciation benefits.

Before you engage the services of cost segregation firm, ask them the following questions:

1. Do you have professional cost segregation engineers/architects/construction engineers employed in your firm who will do the cost estimating necessary as prescribed by the IRS ATG mentioned earlier? 2. Does your firm actually do the cost segregation analysis or subcontract it out to a third party? 3. What is the experience of your firm in defending the report in front of the IRS (agent level, appeals level, or pre-trail)? 4. Can your firm provide references (names and contact information) of clients who have had cost segregation studies done by your firm for similar facilities? 5. How long has your firm been in business and with regards to the studies your firm claims to have done, are those studies your specific firm did, or are they studies some of your staff members were involved with in previous employment? 6. What methodology does your firm employ, and which section of the IRS ATG describes your methodology? 7. Who will be assigned to the project, what are their credentials, and will any subcontractors be used on the study.

There are, of course many more questions you should ask.

Cost segregation studies, done properly, do provide great tax benefits for taxpayers who can use the additional depreciation. Corporate America uses cost segregation firms on a continuous basis. While smaller taxpayers may benefit from the cost segregation study, it is prudent to determine if the benefits can be used.