Money found: cost segregation studies can help clients realize tax savings.

• Author: Grainger, Angie
• Position: COSTSEGREGATION

Cost segregation is one of the IRS' cash-flow secrets that CPAs, financial planners, real estate investment managers and other professionals can use to realize tax savings for their clients.

Such studies separate personal property (fixtures, lighting, etc.) that have shorter cost recovery periods than real property, such as commercial buildings, assisted living facilities and residential rental units. This allows accelerated tax depreciation deductions on shorter life assets that may have been originally classified as real property ("The Best of Both Worlds," Journal of Accountancy, August 2005).

COST SEGREGATION GUIDANCE

Seeing an increasing number of taxpayers use cost segregation studies, the IRS issued the Cost Segregation Audit Techniques Guide in 2004 to assist their examiners in reviewing such studies and how the IRS evaluates them during an audit.

The ATG also provides guidance on substantiation related to costs versus estimates, requirements of documentation of backup sources and discusses cost segregation's evolution from its origins in the Investment Tax Credit to current practices.

As the legal support to use cost segregation studies for computing depreciation, the ATG cites Hospital Corporation of America v. Commissioner [109 T.C. 21 (1997)].

The sunsetting of investment tax credit in 1981 raised concerns about the sustainability of cost segregation as a means of classifying assets. The U.S. Tax Court ruled in Hospital Corporation that property qualified as personal property under the investment tax credit rules would also qualify for purposes of federal tax depreciation under IRC Sec. 168.

Following the court's ruling, the IRS acquiesced to the use of investment tax credit rules for asset classification purposes (AOD CC-1999-008).

Following the court's decision, the IRS issued a Legal Memorandum in 1999 which stated that reclassification of assets into shorter lives for purposes of depreciation would not be contested by the IRS (ILM 199921045. TNT 104-65 Apr. 1 1999).

The Memorandum advises IRS field agents to confirm that the classifications are based on a detailed cost segregation study performed by qualified experts with appropriate technical skills.

[ILLUSTRATION OMITTED]

FEASIBILITY STUDY

The first step in a cost segregation study is determining whether it's feasible, which includes:

* determining whether the taxpayer will benefit from the accelerated tax deductions;

* reviewing the asset to preliminarily determine the...