Cost Segregation delivers results every time it's applied!

1. Presented by:
Jeff Hobbs
and
Brian Mitrzyk
(pronounced “Me-Check”)

2. It is the process of identifying property
components that are considered
"personal property" or "land
improvements" under the federal tax
code. It identifies and reclassifies
personal property assets to shorten the
depreciation time for taxation purposes,
which reduces current income tax
obligations.
The US Treasury Department States:
“Cost segregation is a lucrative tax strategy that should be
used in almost every major purchase of commercial real
estate.”
Wall Street Journal – June
2003

3. • 1997 - HCA sued the IRS and won $800,000,000+
• IRS Chief Counsel : Requires Cost Segregation Study
be based on contemporaneous records & be fact-based*
• IRS Revenue Procedure 98-60
• IRS Rev. Proc. 99-49/IRC 481/4 Years
• IRS Announcement 2002-37
• IRS Rev. Proc. 2002-9
• IRS Rev. Proc. 2002-18
• IRS Rev. Proc. 2002-19/IRC 481(a)
• Actual Case : Chief Counsel Advice 1999-21945,
5/28/99, IRS Announcement 99-82
• *http://www.irs.gov/Businesses/Cost-SegregationAudit-Techniques-Guide---Chapter-2---LegalFramework#18

4. • 2002 –IRS consents to changes in the method of
depreciation via Form 3115, filed in the year the change is
elected. Taxpayers permitted to catch up on all deductions
from previous years. No amended returns required.
– This “catch-up” is via IRS 481(a) and the adjustment is granted
“automatic consent” by IRS Chief Counsel.
• 2004 – IRS releases Cost Segregation Audit Technique
Guide (CSATG).
• 2006 – The IRS starts to crack down on non-engineering
based study-providers and audits them more frequently.
• 2011 – Economic Stimulus Plan – 100% Bonus Depreciation
• 2014 – Bonus Depreciation expired, 179 reverts to $25,000

5. • The wide gap in MACRS recovery
periods provides a strong incentive for
taxpayers to allocate or reallocate
costs of long-lived property to shortlived property, wherever possible.
– http://www.irs.gov/Businesses/CostSegregation-Audit-Techniques-Guide--Chapter-2---Legal-Framework#6

6. •
•
•
•
Who can perform a cost segregation study?
What qualifications does he/she need?
What documentation is needed?
When can the study be performed and when
is the best time?
• What reports are made to the IRS, and how?
• What is the IRS code section involved?
• What is the minimum asset basis for a cost
segregation study to make sense?

7. • How do the new “Repair & Maintenance”
rules impact cost segregation studies, if at
all?
• How do the new “Repair & Capitalization”
rules impact cost segregation studies, if at
all?
• I want a "cookbook approach" of how to do
this for real estate -- when you can and
cannot under new legislation -- for leasehold
improvements, repairs and new construction.

8. • Are there new opportunities available for a
cost segregation study under the new
regulations?
• What are the steps involved in the process?
• What qualifications should be considered in
hiring a cost segregation firm?
• Does cost segregation have other benefits?
• What about the Inherent Permanency Test &
the Whiteco Factors?

9. • How can a CPA best work with a cost
segregation firm to save time and money for
the client?
• How are cost segregation analyses billed; on
a fixed contract or percentage of dollars
invested in the real estate that is the subject
of the analysis?
• A case study from a recent cost segregation
engagement with the amount of tax savings
to the client would be helpful.

10. The IRS Chief Counsel wrote a memo
saying, ". . . Cost Segregation, for it to be
properly applied, had to involve those with
competencies in architecture, engineering or
construction and/or construction techniques,
in order for personal property assets to be
accurately identified and segregated.”

11. Technically there are no qualifications required
in order to conduct a study. The IRS, as
previously shown, prefers “professionally”
based studies but makes no requirements for
such. This is why it is highly important that a
professional accounting firm of CPAs partner
with an engineering firm in order to deliver a
defensible report. This also insulates the CPA
from professional liability.

12. • Construction drawings
• Construction invoices
• AIA G702 & G703
– Master & itemized sub-contractor’s invoices
• Closing documents or lease agreement
– Appraisal to be included
• General Ledger Account Summary
• Current Fixed Asset Schedule
• At a minimum we need the FAS
– A CSS is more expensive with no
documentation

13. • Cost segregation can be performed at any
stage of ownership, whether purchased,
constructed or leased…
– Design phase
– Pre-construction
– Under construction
– Current occupancy back to January 1, 1987
• The best time is prior to construction
because our recommendations will
increase the short-lived asset basis.

14. • IRS Form 3115, Application for Change in
Accounting Method
– Unless asset has not been placed in service
then normal initial filing procedures
• You, as the CPA, or SHL completes the
3115 for the client to file with the IRS

15. •
167, 168
– Depreciation rules, GDS, ADS, ACRS,
MACRS
•
1245, 1250
– Tangible personal property & real property
•
•
•
•
Dozens of Revenue Procedures & Rulings
Dozens of PLRs
Publication 946
Multiple AODs

16. • QLIs (Qualified Leasehold Improvements)
will generally qualify at $100,000+
• QRPs (Qualified Restaurant Property) will
generally qualify at $75,000+
• Office condos typically qualify at $150,000
• Free-standing buildings will vary wildly due to
the industry and build-out variances, but
generally $150,000+/- will work.

17. • Depreciation consistency rule: cost segregation
studies. If a taxpayer properly changes the
MACRS class or depreciation method for any
type of property in a year after the property was
placed in service, the taxpayer must change the
unit of property to be consistent with the change
for depreciation purposes. For example, if a
taxpayer performs a cost segregation study on
building components and changes their
classification from 1250 to 1245 property, the
taxpayer must use the same classifications to
define the unit of property for capitalization
purposes.
– In essence, no impact for properly performed studies.
– http://www.bakertilly.com/IRS-Issues-New-Repair-Maintenance-Regulations

18. • Clients should begin booking assets in a different format as they
implement the new regulations. The change we will see is that instead of
booking (3) assets (Land, Building, & Land improvements) that the building
and land improvements will be booked in and broken down into far greater
detail, component by component. We already do this on many new
construction projects. Acquisitions will have to be more detailed in the
future.
• The opportunity for Cost Seg providers is that we are the qualified
professionals who can most easily and accurately provide that greater
level of detail, especially for the acquisitions. We foresee the studies
becoming slightly more time consuming because every project should be
broken down into as much detail as we can reasonably provide without
getting carried away.
• In summary, Cost Seg studies will be even more relevant than before
because we will now provide a two-fold benefit, accelerated depreciation
and componentization to meet the new regulatory requirements.

19. • Additionally, some of the hidden tax benefits
for taxpayers that were highlighted at the
AICPA conference include:
– Segregating the cost of structural components of
buildings that were disposed of in prior years
– Identifying expenditures in prior years or current years
that do not constitute improvements to buildings or
building systems and can be expensed as repairs
– Reviewing the results of a prior year cost segregation
study to identify dispositions of 1245 property
– Identifying the cost of removal of a structural
component not subject to capitalization under 263A
– To segregate the cost of the eight building systems for
purposes of applying the improvement and disposition
rules under the final regulations

20. • How are expenditures treated?
– When capitalizing expenditures, the amounts paid fall into one
of two categories:
• Amounts paid to acquire or produce tangible property, or
• Amounts paid to improve tangible property.
• Generally capitalized costs include invoice price, transaction
costs, and costs for work performed prior to the date the
property is placed in service by the taxpayer. If the taxpayer
is improving or “bettering” the real or personal property
amounts that must be capitalized include correcting a
material defect of the property, physical enlargement,
expansion, or a material increase in capacity, productivity, or
efficiency of the property. A taxpayer must capitalize costs
that restore a unit of property to like new condition after the
end of its class life. Costs incurred to adapt a unit of property
to a new or different use must also be capitalized.

21. Early – Often – Always!
• Is your client paying income taxes?
– If so, what tax bracket? Subject to AMT?
• Will your client own/lease at least 3 years?
• Is there a NPO occupying 50.1% or more of
the building? If so, it doesn’t qualify.
• Do they meet the minimum asset values?
– $75k - $100k QRPs/QLIs or $150k for buildings

22. • Short answer…YES!
– New acquisitions or construction
– Building expansion
– Capital improvements
• In summary, cost segregation studies will be
more relevant than before because a CSS
will now provide a two-fold
benefit…accelerated depreciation and
componentization to meet the new regulatory
requirements.
– A side benefit is the detailed substantiation for

23. • Engage a reputable Cost Segregation firm
• The engineer determines what documents are available
& what must be recreated
• Time is scheduled into the Cost Segregation process
for document recreation
• The engineer then sets a schedule for surveying the
subject property
• The site survey is executed and completed
• The number crunching process begins
• A review committee then examines the results of the
analysis
• The study results are compiled into a final report and issued

24. • Does the Cost Seg firm use the accounting based
approach, the engineering based approach or a
combination of both?1
• Construction experience?2
• Cost Segregation experience?3
• Estimating experience?4
• Project complexity.5
• IRS Cost Segregation Audit Techniques Guide.6
• IRS audit track record.7
• Bonus Depreciation/QLI/QRP knowledge and
experience.8

25. • Accounting based studies strictly use construction project costs as
provided to them by the contractor, sub-contractors, other project
invoices, and general ledger activity. They use only accounting based
methods to identify and segregate property. These firms are not capable
of performing engineering based take-offs that provide a higher level of
benefit. No site visit is performed.
• Engineering based studies use only the construction plans & contracts,
sub-contracts, invoicing, and quantity take-offs. They do not work with
accountants to include out-of-pocket expenses that need to be included
in the study. They rely primarily on the construction plans and site visits
to perform take-off estimates for most or all assets.
• Combination based studies use both accounting & engineering methods
to assemble the most complete and accurate study possible. Engineers
& construction professionals complete the studies and consult with the
CPA and owner accounting professionals to ensure studies are meeting
the requirements set forth by the IRS CS Audit Techniques Guide.

26. • 2Does the firm employ persons having practical
commercial construction experience or
training?
• 3Does the firm employ persons with experience
at a large national accounting firm? Critical
to understanding depreciation methods &
conventions, general ledgers, and the proper
treatment of the various project-related
expenses beyond the general contract.
• 4Thorough understanding and proper use of RS
Means and Marshall Valuation Services
estimating materials and techniques.

27. • 5Experience in performing studies of
everything from Square Foot analysis of
the simplest buildings to new construction
of multi-million dollar commercial projects
in varied manufacturing and construction
environments.
• 6Extensive and practical knowledge of the
Cost Segregation Audit Techniques Guide.

28. • 7Provide examples of successfully
defended audits, if any audits occurred,
whether by individual engineer or the firm
• 8Extensive background in working with
and applying bonus depreciation for all
applicable years, QLI & QRP calculations
per individual year applications

29. • It can reveal opportunities to reduce real
estate tax liabilities and identify certain
sales and use tax savings opportunities.
– Personal property assessed at a lower rate
– Some states grant “sales & use tax”
deductions
• Maximize tax savings by adjusting the
timing of deductions.
• Create an audit trail documenting cost and
asset classifications.
• Capture retroactive savings with 481(a).

30. • These criteria included:
1. whether the asset is movable or
removable;
2. how the asset is attached to real
property;
3. the design of the asset; and
4. whether the asset bears a load.

31. • As summarized by the Tax Court in Whiteco Industries Inc. [65
T.C. 664 (1975)], the following essential factors were examined
to determine whether property was inherently permanent:
* Is the property capable of being moved, and has it in fact
been moved?
* Is the property designed or constructed to remain
permanently in place?
* Are there circumstances that tend to show the expected or
intended length of affixation, i.e., are there circumstances that
show that the property may or will have to be moved?
* How substantial and time-consuming a job is removal of the
property? Is it "readily removable?”
* How much damage will the property sustain upon its
removal?
* What is the manner of affixation of the property to the land?

32. • Determine…is the client profitable and
paying federal income taxes; if so…
• Be proactive…ask your client a stupid but
necessary question…
– Do you want me to minimize your taxes as
much as possible…legally of course?
• Share the current FAS with your cost
segregation partner for a benchmark
analysis. SHL provides them for free and
GUARANTEES the results.

33. • Reputable firms bill on a fixed fee basis
based on complexity, asset size, industry,
available documentation, and location.
– Example: A 100,000sf warehouse would be
considerably cheaper than a 100,000sf
telecommunications center.
– Most collect ½ of the fee at engagement and the
remainder at delivery of the final report results.
– Beware any mention of contingency as this is
covered under Circular 230 and all those
practicing before the IRS are banned from it.

35. • Cost segregation is a tool that accomplishes
many things…
– Increased cash flow for your clients
– Operating budget reduction = higher profitability
– Places client in IRC Tax Compliance
– Adds tremendous value to your services
– Gives you a competitive edge over competition
– Happier clients remain your clients
• Client retention vs. Client acquisition

36. 2150 S. Central Expy, Ste. 200, McKinney, TX
75070
www.SegregationHolding.com
www.SegregationHoldingLimited.com
972-865-9050 Office / 972-865-9626 Facsimile
972-897-8019 Jeff’s Cell
JHobbs@SegregationHolding.com
269-303-0810 Brian’s Cell
BMitrzyk@SegregationHolding.com

37. • MACRS = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#6
• Section 1245 & 1250 = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#12
• What is tangible personal property? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#8
• Tangible Personal Property = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#10
• What is the Investment Tax Credit 68? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#9
• Building Structural Components = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#11
• HCA Ruling = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#16
• Chief Counsel Guidance = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#18
• No Bright-Line Test = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#19
• Component Depreciation = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#3
• Bonus Depreciation 2008 = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#7
• Change in Accounting Method = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.2-Change-in-Accounting-Method
• Cost Segregation Methodologies = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies
• Detailed Engineering Approach = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies#5
• What Methodology is Required by the IRS? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies#11
• Principal Elements of a Quality CSS = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-SegregationStudy-and-Report
• Preparation by an industry expert = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-SegregationStudy-and-Report#4
• What is a quality cost segregation report? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-CostSegregation-Study-and-Report#2
• Repeal of ITC & Component Depreciation = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#15
• Depreciation Overview Chapter 6.3 = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.3-Depreciation-Overview
• IRC Section 481(a) = http://www.journalofaccountancy.com/Issues/1998/Apr/grimes.htm
• Rec. Proc. 2004-11 (Automatic Consent Procedure) = http://www.irs.gov/irb/2004-03_IRB/ar11.html
• CSATG = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Table-of-Contents
• Depreciation Recapture = http://www.irs.gov/publications/p544/ch03.html#en_US_publink100072560
• Form 3115 = https://www.dropbox.com/s/13kl2n2dxvgd5yl/IRS%20Form%203115.pdf
• IRS Case Studies = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.4-Relevant-Court-Cases
• Residential Rental Property Depreciation = http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219045
• How to determine which MACRS method applies = http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219071
• Publication 527 (2012), Residential Rental Property = http://www.irs.gov/publications/p527/index.html
• ERTA 1981 = http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981
• Cost Segregation Relevant Court Cases = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.4-Relevant-Court-Cases
• Depreciation Overview = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.3-Depreciation-Overview
• CSS Specific Guidance for Restaurants = http://www.irs.gov/Businesses/Cost-Segregation-Guide---Chapter-7.2-Industry-Specific-Guidance---Restaurants
• IRS Form 3115 = https://www.dropbox.com/s/qpyfwx1n941nsn3/IRS%20Form%203115.pdf
• Publication 946 – Bonus Depreciation = www.irs.gov/publications/p946/ch03.html
• Repairs & Capitalization = http://www.irs.gov/irb/2012-14_IRB/ar05.html
• Baker Tilly Presentation in PDF = https://www.dropbox.com/s/dso1dsfsydve6jx/Baker%20Tilly%20Repair%20%26%20Maintenance%20Tax%20Webinar.pdf