| There are many myths surrounding cost | | | | cost segregation studies. All six approaches, |
| segregation and its benefits. The truths | | | | or blended versions of them, are acceptable |
| behind those myths are discussed below, as | | | | to the IRS. No one method is favored. |
| well as some answers to very important | | | | |
| questions. | | | | Myth: There are no real standards for a Cost |
| | | | Segregation Study. |
| Myths: | | | | |
| | | | The IRS has established a set of guidelines |
| The IRS prefers one method to another There | | | | that define what they call a "quality study." |
| are no real standards for a cost segregation | | | | The definition of a "quality study" is one |
| study A CPA cannot really provide a cost | | | | that addresses each of the 13 elements listed |
| segregation study; you need a "professional". | | | | below. |
| | | | |
| Myth: The IRS prefers one method for | | | | - Preparation by an individual with expertise |
| valuation to another. | | | | and experience |
| | | | |
| The IRS has identified six methods for | | | | - Detailed description of the methodology |
| providing cost segregation services, each | | | | |
| having its pluses and minuses. More important | | | | - Use of appropriate documentation |
| is that the IRS does not endorse or favor one | | | | |
| method over the other. According to the IRS | | | | - Interviews conducted with appropriate |
| Audit Techniques Guide: | | | | parties |
| | | | |
| Neither the Service nor any group or | | | | - Use of a common nomenclature |
| association of practitioners has established | | | | |
| any requirements or standards for the | | | | - Use of a standard numbering system |
| preparation of cost segregation studies. The | | | | |
| courts have addressed component depreciation, | | | | - Explanation of the legal analysis |
| but have not specifically addressed the | | | | |
| methodologies of cost segregation studies. | | | | - Determination of unit costs and engineering |
| | | | "take-offs" |
| The Service has addressed this issue but only | | | | |
| briefly, i.e., Revenue Ruling 73-410, 1973-2 | | | | - Organization of assets into lists or groups |
| C.B. 53, Private Letter Ruling (PLR) 7941002 | | | | |
| (June 25, 1979), Chief Counsel Advice | | | | - Reconciliation of total allocated costs to |
| Memorandum 199921045 (April 1, 1999). These | | | | total actual costs |
| documents all emphasize that the | | | | |
| determination of § 1245 property is | | | | - Explanation of the treatment of indirect |
| factually intensive and must be supported by | | | | costs |
| corroborating evidence. In addition, an | | | | |
| underlying assumption is that the study is | | | | - Identification and listing of section 1245 |
| performed by "qualified" individuals or | | | | property |
| firms, such as those employing "...personnel | | | | |
| competent in design, construction, auditing, | | | | - Consideration of related aspects (e.g., IRC |
| and estimating procedures relating to | | | | § 263A, Change In Accounting Method and |
| building construction" (PLR 7941002). | | | | Sampling Techniques) |
| | | | |
| The six IRS-approved methods are: | | | | Myth: A CPA cannot really provide a Cost |
| | | | Segregation Study, you need a "professional". |
| - Detailed engineering approach from actual | | | | |
| cost records | | | | This myth clearly assumes CPAs lack the |
| | | | expertise to perform cost segregation |
| - Detailed engineering cost estimate approach | | | | analyses. Especially on new construction, |
| | | | where there are good cost records, a |
| - Survey or letter approach | | | | knowledgeable CPA can do a more than |
| | | | acceptable job in preparing a cost |
| - Residual estimation approach | | | | segregation study. With proper cost records, |
| | | | a CPA can effectively and professionally |
| - Sampling or modeling approach | | | | complete an engineering-type study using cost |
| | | | records. In many cases, we find ourselves |
| - "Rule of thumb" approach | | | | assisting a CPA, not by providing the |
| | | | valuation, but by helping to assign lives of |
| Each of these methods is acceptable and each | | | | assets and assuring that the assets are |
| has been and will be used by tax payers to do | | | | properly allocated. |