The IRS recommended approach to cost segregation is the Engineering Approach. Most cost segregation companies claim to be using some form of Engineering Approach; however, the majority of them are actually providing an Abbreviated version known as a Residual Study. While they may use Engineering methods to identify and assign costs to the short life assets, they then simply lump the remaining balance into the long life “Real Property” category. Often times, these studies will leave out many items that should be reclassified, resulting in lost benefits to the property owner. The study may even over estimate the amount of personal property, leaving the owner open to increased scrutiny and risk in the event of an IRS audit. What’s more is that these Residual providers are typically charging between 75-120% of a true Engineering Based Cost Segregation Study even though their short-cut approach takes significantly less work.
What is meant by a True Engineering Based Cost Segregation Study?
We conduct our studies using true Engineering-Based Methodology. A true Engineering Based Study or Report will have as much detail for the remaining long life assets as it does for the short life assets. This means that every asset in a property is assigned both a depreciable life and a project cost. All short life AND long life assets are reconciled and accounted for. The property owner will receive the greatest tax benefit with the comfort of knowing that the study is fully supported. Each and every study we produce has all of 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.
In addition to receiving the greatest immediate tax benefit from a true Engineering Based Study, the property owner can also take advantage of the ability to write off long life assets in the years following the study. If a long life asset such as a roof or air-conditioning unit needs to be replaced in the next 39 years, the owner can write off the remaining depreciable balance of that component all in the same year. This can amount to tens, or hundreds, of thousands of dollars in tax benefits that would otherwise be lost.
The Difference is In the Details
Before deciding on a provider, ask to see a sample of their final report. Check the 39 or 27.5 year detail. How many line items do you see? A true Engineering Based Cost Segregation Study will provide hundreds or thousands of line items detailing the building’s components.