Cost segregation process

Brian Coddington | Source Advisors

26 Jul, 2020. 7 min read

Benefits of a Cost Segregation Study

Every company has a different approach to their cost segregation study, but the main steps are usually the same. Here at Source Advisors, this is our process:

1

Pre-qualification (Week 1)

Every Source Advisors study begins with our detailed pre-qualification process where the scope of work is defined and an estimate of benefits is generated. A flat fee quote is also presented with the estimate of benefits.

2

Request and gather data (Week 2-4)

Once the proposal is signed, our team will gather and analyze information provided by you, such as: Construction drawings, invoices, change orders, depreciation schedules, etc.

3

Perform study (Week 3-5)

From the invoices, we will identify any property that might be specifically reclassified. In the likely event that the invoice detail is insufficient for the entire study, we will augment the invoices with detailed estimates derived from the construction drawings and site visit of the property. The results will be presented in a report that includes our methodology, relevant case law, definitions, property description, photos, and detailed schedules of our calculations.

4

Review report (Week 5-6)

Each study is reviewed a minimum of three times to ensure accuracy and quality. It typically goes through a peer review, senior management review & final review.

5

Finalize the report (Week 6)

A draft report is first issued and discussions are held with the taxpayer and their CPA to verify Source Advisors assumptions and findings. Once all questions have been addressed and adjustments made to the report, the final report is issued.

6

Audit Support

In the event that a study is reviewed in an IRS examination, Source Advisors’ highly experienced management team will provide audit support through the Appeals stage.

The Source Advisors approach

At Source Advisors relationships matter. Trust, integrity, and hard work are the core values that have driven our success and created partnerships with many of the nation’s most prominent accounting firms, associations, and Fortune 1000 companies.

Our approach to cost segregation follows these values. At Source Advisors, we don’t train our team on your dime. We only hire heavily experienced cost segregation specialists. We believe experience is critical to maximizing the benefits of cost segregation, and the majority of our team has spent between 10 and 20+ years managing cost segregation projects. Even our least experienced member has conducted more studies than many who manage projects at large firms.

We have a specialized in-house dedicated cost segregation team. Our team is composed of architects, professional engineers, CPAs, MBAs and LEED cost segregation specialists dedicated solely to cost segregation. Our management team is involved in every project we’re engaged to perform and often conduct the site visits themselves. And, with rare exceptions, we always conduct a site visit. The IRS expects it, and we believe it is the best way to accurately assess a property.

Another thing that separates us from the competition is that we have a national presence. Our project managers are located in all major markets across the United States. We also follow the IRS cost segregation guidelines. Our studies are designed to meet the expectations of the IRS as described in its Cost Segregation Audit Techniques Guide. And finally, audit defense is included in all cost segregation studies that we perform.

We believe experience is critical to maximizing the benefits of cost segregation, and the majority of our team has spent between 10 and 20+ years managing cost segregation projects.

Services related to cost segregation

There are several services that can be used along with/enhance a cost segregation study. One of these services is called a disposition study. A disposition study is a detailed analysis of existing assets removed from service in the current tax year for the purpose of creating a dispositions expense. This includes both §1245 and §1250 assets.

Another service related to cost segregation is called a fixed asset review. Fixed asset reviews allow companies to correct past depreciation schedules and maximize depreciation expense deductions, achieving compliance and setting a precedent for managing depreciation schedules going forward. While fixed asset reviews are not a new concept, the opportunities afforded to taxpayers by the Tangible Property Regulations, PATH Act, Tax Cuts and Jobs Act and CARES Act are highly complex and difficult to apply. A Source Advisors Fixed Asset Review might include cost segregation opportunities, repair opportunities or risks, §1245 property improperly capitalized or bonus incorrectly applied, Full Asset Dispositions, Partial Asset Dispositions, and opportunities to apply bonus depreciation. It can also include opportunities to apply for qualified leasehold, restaurant and retail improvements for year placed in service prior to 2018, qualified Improvement Property (QIP) for years placed in service after 2015, and qualified Real Property (QRP) for years placed in service after 2017.

You can also pair energy studies with cost segregation. The §179D study is an energy-efficiency study for commercial real estate. It’s a tax deduction that provides a deduction of up to $1.80 per square foot for the installation of systems that reduce the total energy and power costs by 50 percent in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001 for buildings and systems placed in service before January 1, 2016, or ASHRAE 90.1-2007 for buildings and systems placed in service before January 1, 2017. Eligible building systems include the building envelope, interior lighting systems, heating, cooling, ventilation, and hot water systems. The other energy study that can be paired with cost segregation is the §45L study. The §45L study is an energy-efficiency study for residential housing and is a tax credit that offers developers a means to offset the costs associated with building energy-efficient single family or multifamily properties. The credit provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased to residents.

The final study that can be paired with a standard cost segregation study is an enhanced cost segregation study. An enhanced cost segregation also focuses on prospective Tangible Property Regulations needs. It identifies units of property, building systems, and major components. The level of detail is highly customizable depending on the type of property as well as the property owner’s tax and business needs.

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