A Poorly Performed Cost Segregation Study Can Lead to IRS Scrutiny Years Down the Road

There are many benefits to a Cost Segregation Study. But, a poorly performed cost segregation study can haunt you for as long as you apply a depreciation deduction for the property to your tax return.

If you own commercial property, a Cost Segregation Study will lead to tax savings that will make a tremendous difference to your bottom line. It is important to have the study done by a reputable company that uses the proper engineering methodology, as recommended by the IRS.

Ronald Pearce and Darryl Pearce versus the Department of Revenue, State of Oregon.

Ronald and Darryl Pearce learned the hard way, how important it is to have your Cost Segregation Study performed by the right firm. They chose to perform the cost segregation analysis for their rental apartment properties using the rule of thumb method, trusting their research because of their experience in the apartment industry. The cost segregation studies were performed for the 2004 tax year. 

Then, in 2006 and 2007, they were audited. Plaintiffs argued that the defendant could not examine a closed year, 2004, to determine the amount of deduction that should properly have been taken in 2006 and 2007.

In conclusion, it was decided that the defendant had the right to examine a closed tax year to recalculate depreciation deductions for open tax years. Read the entire case of Ronald Pearce and Darryl Pearce versus the Department of Revenue, State of Oregon.

The Ghost of Tax Years Past

A poorly performed cost segregation study can haunt you for as long as you apply a depreciation deduction for the property to your tax return. This decision further illustrates the need to select the most qualified provider to perform your study.

The Pearce brothers did not follow proper protocol as required by the IRS cost segregation audit techniques guide; expressly the thirteen principal elements.

13 Principal Elements of a Quality Cost Segregation Study

  1. Preparation by an Individual with Expertise and Experience
  2. Detailed Description of the Methodology
  3. Use of Appropriate Documentation
  4. Interviews Conducted with the 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)

Our Studies are Audit-Proof

When we perform a Cost Segregation Study, you will receive the greatest tax benefit along with the comfort of knowing that the study is fully supported. Every study we produce has the necessary detail, documentation, and supporting work-papers to stand on their own. 

However, in the event of an IRS audit and/or if any questions are raised, we will defend our studies at no additional cost. We will even cover any necessary travel costs.

Contact Us today for a no cost, no obligation evaluation.

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