Cost Segregation FAQ
The principle goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating depreciation expense deductions. Through this analysis, the components of a building are reclassified into proper class “lives” according to government legislation, case law, and IRS revenue rulings and procedures. Substantial tax savings can be achieved by accelerating depreciation deductions.
Though it has been around in its current form since 1987, cost segregation was almost solely offered by Big 4 accounting firms and a handful of large real estate consulting companies that serviced only the largest of clients. There were few qualified practitioners, and for small to medium size companies the service was cost prohibitive. Within the last few years cost segregation has become available and affordable to smaller companies and individual property owners.
SourceHOV | Tax consultants gather documentation, such as construction plans, contractor invoices, depreciation schedules, etc. From these documents, we identify the qualifying items and associated costs to be reclassified into shorter-life categories. We conduct a site visit to compare what was actually built against the plans, and we photograph the property. Results are aggregated and presented in a report, along with relevant case law data, definitions, photo documentation, and calculation details.
Absolutely. Over 1,000 IRS revenue rulings and court cases provide the necessary guidelines to properly conduct a cost segregation study. The IRS also issued an Audit Techniques Guide that defines a quality cost segregation study.
The benefit of a cost segregation study lies in the timing of tax payments. Assuming a 35 percent federal tax rate, an 8 percent discount rate, half-year convention, and no bonus depreciation: every $1 million of property reclassified from 39 years has a cumulative present value of tax deferral equaling approximately:
- $195,000 for 5-Year Property
- $178,000 for 7-Year Property
- $108,000 for 15-Year Property
In other words, the benefit is approximately $.19 for every dollar reclassified to five years from 39 years.
No. The chances of getting audited are not automatically increased.
At the start of a cost segregation study, SourceHOV | Tax only has to know certain basic information in order to provide an estimated benefit. Once engaged, the more information available the better. The following list is fairly comprehensive:
- Date of acquisition or “placed-in-service date”
- Capitalized costs
- Complete set of plans
- Contractor’s final application for payment or similar document
- Complete list of all change orders with a brief description of each
- Copy of the specifications (if readily available)
- Rent roll or similar document (for multi tenant buildings only)
- List of owner incurred costs above and beyond the general contractor costs. (examples include architectural and engineering fees, permits, testing and materials paid for directly by the owner)
- The date of acquisition or “placed-in-service date”
- The capitalized costs
- Depreciation schedule
- Plans, site plans and surveys (If available)
- Square footage of buildings and site
- Appraisal (If available)
- Rent roll or similar document (For multi tenant buildings only)
A site visit is an essential part of a good study. Sufficient information can be collected to accurately perform a cost segregation study in the event that construction drawings and cost information are not available.
For small to medium size projects, SourceHOV | Tax typically issues the final deliverable three to six weeks from the point that all information is received. The time of year is a determining factor since consultant workload is much heavier in the periods just before filing deadlines. Upon receipt of an engagement letter, a specific schedule for completion is assigned to each project based upon client needs, time of year and IRS deadlines.
No problem. In fact, this situation is good for both sides. SourceHOV | Tax consultants work with construction personnel to document costs and other information to streamline the process as much as possible.
This is not a good idea for several reasons.
- SourceHOV | Tax architects, engineers and CPAs are specialists in this field with decades of cost segregation experience. We understand the construction side as well as the accounting side. Architects and engineers alone are typically not familiar with the many subtleties involved in a comprehensive study.
- Our combination of construction industry professionals, in house CPAs and full-time research staff provides you with assurance that your study will be fully compliant with the latest changes the tax law and court cases.
- The SourceHOV | Tax team is experienced in defending our work in the event of an audit. We provide up to 40 hours of audit support free of charge.
No. IRS Revenue Procedure 96-31 and subsequent updates, allows a taxpayer to file a form 3115 Automatic Change in Accounting rather than an amended tax return. This form can be used to fix depreciation as far back as 1987. SourceHOV | Tax can prepare the 3115 for you.
That’s right. IRS provisions will allow you to “catch up” on missed depreciation by filing a 3115. No need for an amended return.
In some situations this can reduce the benefit if the tax basis is decreased. We recommend speaking to SourceHOV | Tax consultants about the specifics of your property. Together we can devise the best strategy.
No, we do not charge for estimates. Let’s discuss your property and tax situation and ways we can help maximize your tax savings.
No. While more information will result in a more accurate estimate, we can use information collected from similar projects to estimate benefits for your situation.