The majority of cost segregation providers are conducting studies using the “Residual” method. Yet, it is difficult to find a single cost segregation provider advertising that they provide “Residual” Cost Segregation Studies. Why do you think that is? Perhaps it is because the IRS states that Residual studies are, “simpler and less time consuming” and “can also be less accurate”. The IRS further states that the Residual method, “generally does not reconcile project costs” and “can produce a skewed in result in favor of s1245 property”. Once you truly understand what a Residual Study is, you start to get a sense of why providers are not advertising that they use this abbreviated method. [Read more…]
As in the case of Ronald Pearce and Darryl Pearce versus the Department Of Revenue, State of Oregon. (CLICK HERE for the full tax case.) The plaintiffs chose to perform the cost segregation analysis for their rental apartment properties using the rule of thumb method. They believed their analysis was proper because of their experience in the apartment industry. The cost segregation studies were performed for the 2004 tax year. Years later, 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 [Read more…]
Property Owners entrust Property Managers to maximize the return on their building investment. So why wouldn’t Property Managers suggest cost segregation as an additional cash flow benefit to the Property Owner?
Property Managers have all the viable property information to solicit a no cost, no obligation, cost segregation proposal that will lay out the benefits of cost segregation along with the costs to complete the comprehensive study. The Property Manager can present the proposal to the Property Owner and/or his or her CPA to [Read more…]
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 [Read more…]
A Cost Segregation Study performed In-House, by employees of the company, is often times reviewed with more scrutiny by the IRS.
Here is the summary of the Boddie-Noell Enterprises court case:
- The Company owned and operated approximately 240 Hardee’s restaurants.
- The two employees who conducted the original cost segregation study used an estimate of a existing study conducted by Hardee’s Food Systems which indicated 24% of the assets qualified for ITC. They sent questionnaires regarding costs to contractors but didn’t keep those records.
- The IRS examined the methodology and threw out the results of the study.
- The company took it to court and hired an individual cost segregation practitioner to conduct studies on 7 properties prior to trial.
- The practitioner did not visit any of the sites.
- Indirect costs were improperly allocated to the estimated take offs (i.e. the allocation of excavation and other site work to electrical, HVAC, etc.)
- Some costs were taken from estimating books others were randomly assigned or adjusted from the estimating books.
- After examining the methodology the court stated, “The methodology employed by plaintiff…. was at best, unusual.” They also stated that the results of the 7 studies performed by the individual cost segregation practitioner appeared to be “based on after-the-fact speculations”. The court also found a lack of contemporaneous evidence supporting the corporations’ claims.
Typically, building costs are classified for federal income tax purposes into three categories. Each has a different depreciation recovery period and method under the Modified Accelerated Cost Recovery System (“MACRS”):
TANGIBLE PERSONAL PROPERTY
Depreciates Over 5 OR 7 YEARS
At a 200% Declining Balance
Depreciate Over 15 YEARS
At a 150% Declining Balance
RESIDENTIAL RENTAL – REAL PROPERTY
Depreciates Over 27.5 YEARS
Straight Line (Residential)
COMMERCIAL – REAL PROPERTY
Depreciates Over 39 YEARS
Straight Line (Commercial)