By A. Chris Ostler, CPA
For the first time in many years, the Internal Revenue Service issued a revised Cost Segregation Audit Technique Guide to assist its Revenue Agents and Field Agents in determining the soundness of cost segregation studies submitted by taxpayers to substantiate accelerated depreciation deductions taken on filed tax returns.
These updates were necessary due to the myriad changes to the tax code ushered in by the PATH Act of 2015, the TCJA of 2017, the CARES Act of 2020 and the Consolidated Appropriations Act of 2020. All these are coupled with enhanced guidance based upon the Service’s Revenue Agent Report’s from recent cost segregation audits on what is considered acceptable to get to a tax return filing position. The new updates primarily relate to Section 263A, Section 179, Section 179D Energy Tax Deduction, Qualified Improvement Property and Bonus Depreciation.
A properly prepared cost segregation study identifies and reclassifies real property assets into personal property assets to shorten the depreciation time, which accelerates depreciation expense and reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and some indirect construction costs. The primary objective of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building itself. Personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation of the building. Land Improvements generally include items located outside a building that are affixed to the land. Land improvements include parking lots, driveways, paved areas, site utilities, walkways, sidewalks, curbing, concrete stairs, fencing, retaining walls, block walls, car ports, dumpster enclosures, and landscaping.
Shortening tax class lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow. Schedule your complimentary consultation today to discuss the impact of this new guidance at https://calendly.com/achrisostlercpa