Classify assets into property classes (e.g., land, land improvements, building, equipment, furniture and fixtures);
Explain the rationale (including legal citations) for classifying assets as either § 1245 or § 1250 property; and,
Substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs.
A "quality" cost segregation study
is a study that is both accurate and well-documented with regard to the three points above. Quality studies greatly expedite the Service’s review, thereby minimizing audit burden on all parties. A quality study contains a number of characteristics, which are set forth below.
1. Preparation By An Individual
With Expertise And Experience
2. Detailed Description Of The Methodology
3. Use Of Appropriate Documentation
4. Interviews Conducted With Appropriate Parties
5. Use Of A Common Nomenclature
6. Use Of A Standard Numbering System
7. Explanation Of The Legal Analysis
8. Determination Of Unit Costs And Engineering "Take-Offs"
9.Organization Of Assets Into Lists Or Groups
10. Reconciliation Of Total Allocated Costs To Total Actual Costs
11. Explanation Of The Treatment Of Indirect Costs
12. Identification And Listing Of Section 1245 Property
13. Consideration Of Related Aspects (e.g., IRC § 263A, Change In Accounting Method And Sampling Techniques)
Cost Segregation Overview
A cost segregation analysis involves identifying and properly reclassifying the capitalized amounts allocable to tangible personal property, other tangible property (i.e., IRC Section 1245 property), and land improvements from building costs (typically depreciated over 39 years).
Opportunities for a Cost Segregation Analysis Engineering-based Cost Segregation Approach
· New Construction
· Remodel, Expansion or Reconstruction of an existing facility.
· Leasehold Improvements
· The purchase of a building
Engineering-based Cost Segregation Approach
· A physical inspection of subject property.
· Discussions with client representatives.
· An analysis of all cost data, including the general contractor’s application for payment, change orders, owner-incurred cost, and indirect costs.
· A thorough examination of the architectural/engineering drawings and specifications to classify the construction costs according to their appropriate depreciable categories.
· The identification and preparation of an itemized list of those property units that, in our opinion, do and do not qualify for the shorter life based on our experience with the IRS and interpretations of revenue rulings, private letter rulings, and judicial decisions.
· A distribution of direct costs to qualified and non-qualified property units by developing quantity take-offs of the labor and material for individual property units from the engineering drawings and specifications.
· A proper allocation of the indirect costs.
· A reconciliation of the total capitalized cost used in our analysis to the total project capitalized cost, including architect fees, engineering fees, testing fees, permit fees, contractor general conditions, building construction cost, finish-out costs, change orders, and owner-incurred cost.