Everyday we see advertisements promoting how people can make money performing Cost Segregation studies.

However, the IRS provides stringent Cost Segregation guidelines (see IRS Cost Segregation Audit Techniques Guide).

A Quality Cost Segregation Study:
According to the IRS, a “quality” cost segregation study is a study that is both accurate and well documented. A quality study contains a number of characteristics, which are set forth below.

Principal Elements of a Quality Cost Segregation Study: 13 principal elements
1. Preparation By An Individual With Expertise And Experience
2. Detailed Description Of The Methodology
3. Use Of Appropriate Documentation
4. Interviews Conducted With Appropriate Parties
5. Use Of A Common Nomenclature
6. Use Of A Standard Numbering System
7. Explanation Of The Legal Analysis
8. Determination Of Unit Costs And Engineering “Take-Offs”
9. Organization Of Assets Into Lists Or Groups
10. Reconciliation Of Total Allocated Costs To Total Actual Costs
11. Explanation Of The Treatment Of Indirect Costs
12. Identification And Listing Of Section 1245 Property
13. Consideration Of Related Aspects (e.g., IRC § 263A, Change In Accounting And Sampling Techniques)

The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. Unfortunately, there are no prescribed qualifications for cost segregation preparers. However, a preparer’s credentials and level of expertise may have a bearing on the overall accuracy and quality of a study.

In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of the applicable law, are other important criteria.

A quality study identifies the preparer and always references his/her credentials, experience and expertise in the cost segregation area.

SourceCorp has provided cost segregation services to more than a thousand clients ranging from privately held businesses to Fortune 500 companies, across the U.S and in industry segments ranging from automotive and retail to manufacturing and real estate management companies. Our solution addresses each of the specific requirements outlined below.

Cost Segregation Tax Services:
Our engineering-based cost segregation studies provide more precisely segregated property information, giving our clients the information and detailed supporting documentation they need to meet with strict IRS regulations and requirements for audit defense.

Through our engineering-based cost segregation study a wide range of building components, such as electrical installations, plumbing, mechanical components, and finishes will be identified and as applicable, reclassified into shorter-lived asset classes. This adds up to substantial savings to you.

Benefits May Include:
• An immediate increase in cash flow
• A reduction in current tax liability
• The deferral of taxes
• Ability to reclaim depreciation deductions from prior years

The SourceCorp Approach:
Through what is called “Cost Segregation”, the components of a building will be reclassified into proper class lives according to MACRS (Modified Accelerated Cost Recovery System), case law and IRS revenue rulings. MACRS property is tangible, depreciable property that has been placed in service since December 31, 1986 as prescribed by the Tax Reform Act of 1986. For example, a building’s floor, roof and walls might be classified as 39-year section 1250 real property; site improvements such as sidewalks and landscaping would be classified as 15-year section 1250 real property; carpeting and decorative lighting as 7-year section 1245 tangible personal property and computer associated items as 5-year section 1245 personal property.

SourceCorp’s approach to Cost Segregation studies utilizes a combined invoice and engineering approach designed to discover and accelerate the depreciation of real estate assets for tax purposes. We will begin with all available invoices, payment applications, general ledger entries and other cost documentation to identify the total capitalized costs. In the case of acquired properties we will perform an analysis to determine the Replacement Cost New Less Depreciation and allocate these costs to the purchase price by CSI Division.

The capitalized costs will be broken down into direct and indirect costs. The direct costs will be further distilled down to 5, 7, 15, and 39-year categories. We will then look at architectural and engineering drawings and specifications to identify shorter-life assets, down to individual electrical duplex outlets and their supporting conduit, wire, and breakers. If drawings and specifications are unavailable, we will quantify this information on-site. All of the indirect costs will be allocated pro-rata to each of the line items in each class life, and then summarized by property units.

We will identify and separate assets by tenant or cost center allowing for greater detail for fixed asset records and for partial dispositions at the end of a lease agreement or at the time of remodel.

Our work papers will present a very detailed audit trail and our record retention policy will be compliant with Sarbanes-Oxley requirements. If selected for audit, we will defend the cost segregation study at no additional cost, providing 40-hours staff time. NOTE: Practitioners, generally CPAs and enrolled agents, are the only individuals allowed to represent a client’s interest during an exam or appeals. Firms citing the ability to provide audit protection and that do not have CPAs or enrolled agents on staff are ill equipped to represent the client’s interest and cannot fully stand behind their work.

Experience:
The SourceCorp Cost Segregation team has more than 50-year’s experience in cost segregation, tax, architecture, engineering and commercial construction. The SourceCorp Cost Segregation team has experience in almost every type of construction, from professional sports arenas to artificial heart-valve manufacturing.

Free Preliminary Analysis:
A free preliminary analysis can give you an idea of how a Cost Segregation Study can benefit your company. Contact us today by clicking here.

About Us:
SourceCorp is the nation’s leading consulting firm specializing in LIFO Accounting, R&D Tax Credit Studies, Cost Segregation Studies, and Green Building Tax Deductions. Our strength is in understanding the complexities of taxation and construction engineering – we help clients pay less tax and save more money.

Since 1983, SourceCorp has worked closely with CPA firms, manufacturers, wholesalers, building owners, architects, and auto dealerships to realize their vision to increase cash flow, reduce taxes, and build lasting value, while striving to maintain the highest level of customer service, communication and overall satisfaction. SourceCorp is owned by Apollo Management, Inc., a private equity firm based in New York.