Residual Cost Segregation Estimation Approach:
M&E Cost Segregation does not use this method of cost segregation. It is important to note however, that the majority of cost segregation providers are performing some type of Residual Cost Segregation Estimation Approach.
The Residual Cost Segregation Estimation Approach is an abbreviated method of cost segregation in which only short-lived asset costs (e.g., 5- or 7-year property) are determined and detailed. Short-lived asset costs are then added together and then subtracted from the total project cost. The remaining or “Residual” cost is then simply assigned to the building and/or other long-lived assets. Although this method is simpler and less time consuming than the engineering approaches, it is also less accurate.
It should be recognized that the Residual Method does not reconcile project costs. In general, residual costs are not estimated or checked for reasonableness, this is due to the fact that the long-lived assets are not thoroughly studied.
It should also be understood that different estimation techniques for short-lived assets can produce a skewed result in favor of § 1245 property (e.g., § 1245 property based on single-unit costs for high quality construction, while the building is based on gross square footage). 1
1Internal Revenue Service, Cost Segregation Audit Techniques Guide, Chapter 3 Cost Segregation Methodologies (accessed January 2, 2008); available from http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide—Chapter-3—Cost-Segregation-Methodologies#8.