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