The rules around Cost Segregation are complex and can easily be misinterpreted resulting in inaccurate allocations and potentially incorrect or indefensible positions. Thankfully, we can look to court cases and the IRS Cost Segregation Audit Techniques Guide for direction. In addition to providing detailed information on the history of Cost Segregation, depreciation, and landmark court cases, this guide has 13 requirements that outline what a Quality Cost Segregation Study should look like. At Acena, we have developed a streamlined process that simplifies the complicated court rulings, IRS regulations, and steps needed to meet the Quality Cost Segregation criteria. In this blog, you will learn about our Cost Segregation process and how we strive to meet your timely goals!
1. Make Contact With Our Cost Segregation Team
Reach out to us by phone or email and let us know your financial goals. Whether you are a seasoned investor or this is your first study, we are here to help guide you seamlessly through the process.
2. Gather Property Information
The first step in the process is gathering property information in order to develop a Benefit Estimate. Variables such as date of purchase, property type, and location impact the amount of additional depreciation that can be generated using a cost segregation study. During this step, we can also help you to better understand the potential impact on cash flow and reduced taxes.
3. Develop Your Benefit Estimate
The next step is to develop a high-level personalized Benefit Estimate to evaluate the additional depreciation and potential tax savings available.
Our engineering team will use the results of thousands of completed cost segregation studies to estimate the additional depreciation and potential tax savings. We are happy to review this with you and your CPA to answer any questions you may have.
4. Review and Sign Your Engagement Letter
Once we review your Benefit Estimate with you and agree to move forward, we will promptly draft an engagement letter for you to sign. The engagement letter will provide information on the final building basis, additional documents needed, fees, and audit defense. Once signed, we are ready to gather the remaining documents and launch the engagement.
5. Kickoff Meeting - Launching Your Project
At the kickoff meeting, we will review the remaining steps in the process and develop a timeline for completion. We will cover any remaining documents needed, the onsite verification process and access needs while on-site, engineering analysis, and an estimated timeline to complete the final report.
This meeting also provides an opportunity to review any remaining questions at each step of the process.
6. Scheduling Your On-Site Verification
Once we receive the required documentation, our engineering team will review the documentation provided and follow up with any questions. Once they have approved the documentation, they will give us the green light to schedule your on-site verification. While the amount of time on-site varies, it can range from 3 hours to several days (for large apartment complexes or commercial buildings).
We will work with you to gain access to all areas of the property, including closets, maintenance areas, garages, storage rooms, etc. If there is an on-site property manager, we will work with them to access any secured areas. Our process has been tested and refined over hundreds of cost segregation studies and we prioritize moving quickly and efficiently through each room to minimize any disruption in your operations.
7. Completing Your On-Site Verification
On-site, we will photograph and measure all areas of the property. This includes the exterior (structure & site improvements) and interior areas (all rooms, storage, electrical, maintenance, and garages).
Within each area, dimensions will be taken, as well as documenting all items including furniture, wall coverings, flooring, cabinetry, electrical, water, HVAC, ceiling items, etc.
8. The Magic of Engineering Analysis
Taking the information provided by the on-site, current building information, public records, and market data, the Engineering team begins their work.
A deep analysis of the property, including underground site improvements, building materials, and structural components, is completed. This information, as well as the on-site inventory and pictures, is combined to provide a complete picture of the property.
The overall cost (or basis) of the property is then allocated to each asset identified during the study on a relative basis. This is the magic of engineering, as the analysis combines the original cost data and asset values following processes allowed under IRS guidelines and court decisions.
9. Legal Analysis
Once the engineering analysis is complete, we then go through each property component to assign the correct class life. By thoroughly reviewing the legal aspects of asset classification, we can determine which components of a property qualify for accelerated depreciation under the IRS guidelines. Properly assigning class lives to assets is a tedious and important step to distinguishing between personal property, land improvements, and structural components.
10. Final Report Review and Approval
We will review the final report with you and confirm the assets identified are accurate and owned. In the event changes are needed, these will be sent back to Engineering for corrections before finalizing and approving the report.
Stay Tuned
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Next week we will be covering what documents are important to a Cost Segregation Study and why!
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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of Paul VanDerWerf on Flickr.
