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Principal Elements of a Quality Cost Segregation Study *From IRS Audit Techniques Guide*
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 legal analysis
8. Determination of unit costs and engineering “Take-Offs”
9. Organization of assets into lists of groups
10. Reconciliation of total allocated costs to total actual costs
11. Explanation of the treatment indirect costs
12. Identification and listing of § 1245 property
13. Consideration of related aspects (e.g. I.R.C. § 263A, change in accounting method and sampling techniques)
The 13 Vital Elements of a Quality Cost Segregation Study
When it comes to cost segregation, the IRS has no standard format for how the studies should appear. Studies come in a variety of different formats with certain studies being much more detailed or complex than others. If you have any questions for our experts, schedule a call!
However, regardless of how the study is formatted, how long it is, or the methodology that is used, the IRS has provided 13 guidelines in their Cost Segregation Audit Techniques Guide of what they want to see in a quality study.
1. Preparation by An Individual with Expertise and Experience
The IRS emphasizes the importance of preparers possessing a combination of construction knowledge and expertise in tax law. Our team at Leyton is led by CPAs and engineers who bring extensive experience in the cost segregation space. This blend of skills ensures a thorough understanding and compliance with both construction regulations and tax laws.
2. Detailed Description of The Methodology
There should be a detailed description of how assets are being identified, reclassified and reallocated. Our engineering approach uses new replacement cost less the depreciation which is one of the most accurate ways to complete an engineering based study.
3. Use of Appropriate Documentationof a Quality Cost Segregation Study
To have accurate information, it’s important to have the necessary related documentation for a building. We ask for all required documents at the beginning of the study as well as conduct a site visit to ensure we have as much information as possible to complete the study in an accurate manner.
4. Interviews Conducted with Appropriate Parties
When reviewing the documentation, it may become necessary to engage in communication with the contractors, engineers, or architects who participated in the construction of the building. Our team possesses the expertise required to effectively communicate with these groups, ensuring that we obtain the necessary information to successfully complete the study. Whether it involves clarifying construction details or acquiring specific data pertinent to the project.
5. Use of A Common Nomenclature
It’s important to use consistent terminology with industry standards and your specific project documents and define any unique terms.
6. Use of A Standard Numbering System
Emphasizing the importance of employing a clear process when allocating costs to various components of a project, akin to prevalent terminology, cannot be overstated. At Leyton, we adhere to a numbering system aligned with industry standards and your project’s specific documentation, facilitating a seamless and transparent procedure. This meticulous approach ensures clarity and precision throughout the cost allocation process, making it straightforward from start to finish.
7. Explanation of The Legal Analysis
A comprehensive study should provide clear explanations for the classification of assets as either 1245 or 1250 property, supported by references to pertinent tax laws and regulations. We prioritize thorough research of relevant tax legislation, ensuring that our reports are meticulously informed by these insights. By dedicating time to this process, we enhance the accuracy and credibility of our assessments, offering clients comprehensive explanations backed by authoritative sources.
8. Determination of Unit Costs and Engineering “Take-Offs”
After identifying specific components of the property, the next step involves assigning or reclassifying them into their corresponding tax life and asset class, accompanied by the appropriate unit cost. This meticulous process ensures accurate categorization and valuation, aligning with regulatory requirements and optimizing tax planning strategies. By carefully allocating each asset to its designated category, our approach facilitates precise accounting and enhances overall financial transparency and compliance.
9. Organization of Assets into Lists or Groups
The reclassifying and engineering take-offs should be done in an organized manner so that it is easy to follow the work that has been done.
10. Reconciliation of Total Allocated Costs to Total Actual Costs
Given the unique nature of each building, it is imperative that the total allocated costs accurately align with the actual costs incurred during construction. At Leyton, we meticulously ensure this alignment by meticulously allocating total costs to the actual expenses in our engineering breakdown. This meticulous approach guarantees that our evaluations reflect the true financial picture of the project, providing clients with a reliable basis for decision-making and financial planning.
11. Explanation of The Treatment of Indirect Costs
Indirect costs are costs that can be specifically tied to real property. Examples include construction overhead or architectural and engineering fees. We identify each indirect cost and correctly allocate it with the direct costs across the total cost of the project.
12. Identification and Listing of § 1245 Property
1245 property is the type of property that can be accelerated into shorter tax lives from the standard 27.5 or 39 years. A quality study should correctly identify all propertythat has been reclassified to 1245 property or an accelerated tax life. This is the foundation of a quality cost segregation study, and we make sure we properly identify and reclass any and all assets that qualify as 1245 property.
13. Consideration of Related Aspects (e.g. I.R.C. § 263A, Change in Accounting Method and Sampling Techniques)
A quality study addresses related issues, such as § 263A which relates to capitalizing certain costs, Change in Accounting Method, and Sampling Techniques. We can work with your CPA to ensure we account for these different scenarios when completing your study.
A quality cost segregation study has these 13 vital elements, and it’s important that you are using a provider that will ensure your study properly addresses each one of them while still maximizing your tax savings through proper cost segregation techniques.
