A Cost Segregation Study is a federal income tax tool that increases your near-term cash flow, in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. Whether newly constructed, purchased or renovated, the components of your building may be properly classified through a cost segregation study into shorter recovery periods for computing depreciation. The study carves out (into 5, 7, and 15-year lives) certain qualifying portions of your building that are normally buried in 39 or 27.5-year categories. The cost segregation specialists at Engineered Tax Services will help you to uncover the most possible potential tax savings.
Next-Generation Cost Segregation Services
Through our next-generation cost segregation services, we work to uncover potential tax savings and increase cash flow through reclassification and depreciation of property. ETS provides a “Detailed Engineering” review as part of our reporting process and works seamlessly with the IRS and your CPA firm for minimal disruption to your business.
The following identifies what Engineered Tax Services will provide:
- Free – No Risk Initial Review
- Evaluate your current tax status and future business plans to determine the applicability of a Cost Segregation Study specifically for your project
- Evaluate the building’s construction costs by component or systems
- Review the project’s/facility’s construction documents, including as-built drawings and project specifications
- Visit the facility/project to determine and identify how the components and systems are utilized – as well as to document the systems and components
- Provide a “Detailed Engineering” review of the assets including special purpose mechanical and electrical systems, decorative finishes, site improvements, and any process related to special purpose construction
- Classify or reclassify each building component into the appropriate tax life as prescribed by IRS guidelines
- Identify and allocate indirect costs to each asset
- Complete a written report with the asset detail supporting the reclassifications and completion of the necessary tax form(s)
Qualifying properties usually follow these parameters:
Purchase or Acquisition
Properties with large amounts of added features, high-end finishes, and components necessary to operate
|PROPERTY TYPE||RECLASSIFICATION %|
|Assisted Living Facility||22-45%|
|Retail Strip Mall||18-40%|
The Different Approaches Our Cost Segregation Specialists Take To Cost Estimation
At Engineered Tax Services, a qualified engineer always performs a site visit for your cost segregation study. This helps to gather all details for cost estimation, as well as avoid an IRS audit. However, there are different types of cost estimation depending on what is right for your property specifically.
Engineered Documentation Approaches
The cost segregation specialists take the data compiled to produce a comprehensive report for the cost segregation study. To date, the IRS does not have a standard or required procedure in compiling a cost segregation study. The more detailed and accurate a study is, the faster the IRS service provider can review it so that the taxpayer may receive his or her deductions. The IRS guide on cost segregation numerates certain methodologies that are often utilized by specialists including the detailed cost approach, the detailed cost estimate approach, the survey approach, the residual estimation approach, and the sampling approach.
THE DETAILED COST APPROACH
The detailed cost approach compiles costs from construction and accounting records to build a report. Since this method relies on true documentation and little estimates, it is typically the most time consuming but the accurate method.
THE DETAILED COST ESTIMATE APPROACH
The detailed cost estimate approach is generally used for new construction. Much like the detailed cost approach, the detailed cost estimate approach will also need a compiled list of documents. However, when a record is not found the specialist will do an estimate of the cost of the component to report. In order to find these estimates, the specialist must find the cost from a reliable source and have the source referenced in the study. For this reason, it is important that the client provides all requested invoices in order to not have to depend on an estimate of a component.
THE SURVEY APPROACH
For the survey approach, the specialist performs a site inspection and has all the components of the property listed. Then the cost segregation specialist will reach out to the contractor or subcontractors in written form and ask for the prices of each item. Depending on how long ago the work was done, this will dictate how reliable the data of costs will be for each component.
RESIDUAL ESTIMATION APPROACH
The residual estimation approach is a method that determines the cost of short-lived assets, such as on a 5 or 7-year property. Then these costs are added together and then subtracted from the total project cost, while the remaining price is assigned to the building itself or other long-lived assets.
The sampling approach helps costs and resources of the study to be greatly reduced. However, sometimes the accuracy of this approach is more likely to be flawed. This method is applied by performing a cost segregation study on a sample of a large portfolio of properties. Based on those results, a standard model is developed for each facility type. The pricess are then taken from the model and repositioned on a percentage basis. If you are a firm with many properties, this approach may work well for you.
For a complimentary consultation, please call (800) 236-6519. You can also learn more about cost segregation here.