Frequently Asked Questions

A cost segregation study is an analysis performed by tax and engineering professionals to identify and reclassify certain components of a building that can be depreciated over a shorter period than the building itself. This can lead to significant tax savings for property owners.

In a cost segregation study, experts analyze the various components of a building, such as
electrical, plumbing, and HVAC systems, to determine if they can be depreciated over a shorter period, typically 5, 7, or 15 years, rather than the standard 27.5 or 39 years for residential and commercial properties, respectively.

Property owners who have recently purchased, constructed, or renovated a commercial or investment property can benefit from a cost segregation study. This includes owners of office buildings, retail spaces, warehouses, and multifamily properties.

By accelerating the depreciation of certain building components, a cost segregation study can significantly reduce the amount of taxable income for property owners, resulting in substantial tax savings. The exact amount of savings depends on factors such as the property’s cost, the owner’s tax bracket, and the depreciation method used.

The time it takes to complete a cost segregation study depends on the size and complexity of the property, as well as the availability of documentation. On average, a study can take anywhere from a few weeks to a few months to complete.

The cost of a cost segregation study varies depending on the size and complexity of the property. However, the potential tax savings can nearly always outweigh the cost of the study, making it a worthwhile investment for many property owners.

Yes, a cost segregation study can be performed on an existing property. In fact, many property owners choose to perform a study after purchasing or renovating a property to maximize their tax savings.

While cost segregation studies can provide significant tax savings, they also come with some risks. The IRS may audit properties that have undergone a cost segregation study, so it’s important to work with a reputable firm that follows IRS guidelines and provides a defensible study.

When choosing a firm to perform a cost segregation study, look for one with experience in your industry and a strong track record of successful studies. The firm should have a team of qualified tax and engineering professionals and be able to provide references from satisfied clients.

To get started with a cost segregation study, contact a reputable firm and provide them with information about your property, such as purchase or construction documents, blueprints, and depreciation schedules. The firm will then conduct a feasibility analysis to determine if a cost segregation study is likely to benefit you and provide an estimate of the potential tax savings.

No, you do not have to amend your tax return if you want to do a cost segregation study on buildings you own that have been depreciating for several years. Instead, you can report cost segregation using IRS Form 3115, Application for Change in Accounting Method, to claim accelerated depreciation from the cost segregation study on your tax return. This form allows for a change in accounting method without the need to file an amended return for previous years.

The U.S. R&D tax credit is a business incentive that can be used to reduce a company’s federal income tax liability by encouraging research and experimentation based on the hard sciences. It is available for companies developing new or improved business components, including products, processes, computer software, techniques, formulas, or inventions, that result in new or improved functionality, performance, reliability, or quality.

To qualify for the R&D tax credit, a business must be involved in activities that meet the criteria for research and development. The expenditures must be incurred in connection with the taxpay er’s trade or business and must represent research and development costs in the experimental or laboratory sense. This includes activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.

The credit covers a wide range of qualifying expenses, including wages paid to people directly working on, supervising, or directly supporting the development process; supplies used or consumed during the development process; contract research expenses paid to a third party for performing qualified research activities on behalf of the company; and the cost of cloud service providers or leasing computers used in research activities.

Yes, R&D activities conducted outside the U.S., routine data collection or ordinary testing for quality control of existing components, market research, management, consumer preference testing, and research funded by an unrelated third party are excluded from the credit.

Start-up companies and small businesses may be eligible to apply up to $1.25 million—or $250,000 each year for up to five years—of the federal R&D credit to offset the Federal Insurance Contributions Act (FICA) portion of their payroll taxes each year.

Research and development activities that qualify for tax credits include developing new products, processes, or software, improving existing products or processes, and creating prototypes. The key requirement is that the activity must involve technological uncertainty and a systematic process of experimentation.

A tax credit is a provision that reduces a taxpayer’s final tax bill dollar-for-dollar, while a tax deduction reduces taxable income. The R&D tax credit is a tax credit, not a deduction.

The R&D tax credit can be used to offset up to $250,000 of the employer portion of Social Security payroll tax liability, and up to $250,000 of the employer’s Medicare payroll tax liability. It can also be carried forward for 20 years to offset future income tax liabilities if a company experiences losses.

Yes, companies can claim the R&D tax credit retroactively. They can look back at all open tax years—typically three to four years, depending on when tax returns were filed—to claim missed opportunities.

To claim the U.S. R&D credit, taxpayers must include five essential pieces of information in their claim, as outlined by the IRS:

• Identification of all business components that form the basis for the research credit claim.
• For each business component, identification of all research activities performed.
• For each research activity, identification of the individuals who performed the activity and the information they sought to discover.
• Total qualified employee wage expenses, qualified supply expenses, and qualified contract research expenses for the claim year. This information may be provided using Form 6765, Credit for Increasing Research Activities.
• A description of the information sought to be discovered as a result of the research activity, as well as the alternatives evaluated in the process of experimentation.

Yes, there have been several recent changes to the U.S. R&D tax credit rules, particularly affecting start-up companies. These changes have been introduced to encourage innovation and investment in research and development.

• Increased Credit for Start-up Companies: The Inflation Reduction Act of 2022 allows qualified small businesses to apply up to $500,000 in R&D tax credits against their payroll tax liability, an increase from the previous limit of $250,000. This change aims to provide additional financial support for start-ups to invest in R&D activities.
  
  
• Amortization Requirement: Starting in 2022, the Tax Cuts and Jobs Act (TCJA) requires companies to amortize their R&D expenses over five years (for domestic R&D) and 15 years (for foreign R&D) rather than deducting them in the year they were incurred. This change affects the cash flow of start-ups and may discourage investment in R&D.
  
  
• Proposed Changes to Form 6765: The IRS has proposed changes to Form 6765, which is used to claim the R&D tax credit. These changes aim to increase compliance and provide additional guidance to taxpayers. However, some stakeholders have raised concerns that the changes could increase compliance costs and reduce the effectiveness of the credit for start-ups.
  
  
• American Innovation and Jobs Act: There is ongoing discussion and legislation aimed at expanding the R&D tax credit for start-ups and small businesses. The American Innovation and

Jobs Act proposes to increase the refundable R&D credit for small businesses and start-ups, expand eligibility for the credit, and address issues related to the amortization requirement.

• Proposed Adjustments to the TCJA: There are discussions and proposals to amend the TCJA to allow for the immediate expensing of R&D costs. This would revert to the previous tax treatment and potentially provide significant benefits for start-ups and other companies engaged in R&D activities.

We cover all 50 states and, in the case of cost segregation, we’ve done work in foreign countries as well.

Yes.  We perform site visits for all properties.  In the IRS Audit Technique Guide on Cost Segregation, the IRS emphasizes that site inspections enhance accuracy by providing a better understanding of asset design, purpose, and use, and they are described as "critical" in certain scenarios, such as for used or acquired properties.  An on-site inspection allows us to evaluate the condition of the property, identify all assets, and contemporaneously document all these assets through comprehensive photos and videos taken while on site.

We will meet you or your designated representative at the property, if you wish to be present.  We often gain access to properties, with the owner’s permission, via remote access entry.

Our founder, Chris Ostler, has been a CPA since 1996 and has been focused on specialty tax services since 2010.  He has acquired his experience through hard work and study over the past 30 years.  Heather Holcomb is a member of the ASCSP, the American Society of Cost Segregation Professionals, having passed her exam for full membership in the organization.

Fees depend on the size and complexity of the property under review.  Our fees are competitive and flexible enough to meet nearly any client circumstance.

We provide “Forever” audit defense.  This means we will defend our work against IRS audit until the conclusion of the audit, no matter how long it takes, for no additional cost.