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Cost Segregation Studies (CSS)
What are they?
• Comprehensive analysis of hidden personal
or tangible property for commercial
buildings.
• Analyze cost data including the contractor’s
application of payments (AIA), change
orders, owner incurred costs, and indirect
disbursements.
• CSS is not a component study.
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Cost Segregation Studies (CSS)
What are they?
• Analyze purchase price of property to
segregate assets from the building cost
• Generally 15-50% of costs can be
segregated to shorter lived assets
• Allows indirect costs to be allocated to
various depreciable lives.
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• New buildings under construction
• Existing buildings undergoing renovation
or expansion
• Office leasehold improvements and
“fit-outs”
Cost Segregation Studies (CSS)
Applies to What?
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• Purchases of existing properties.
• All post - 1986 real estate construction,
building acquisitions or improvements.
Cost Segregation Studies (CSS)
Applies to What?
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The Evolution of CSS’s
• Pre TRA-86 CSS undertaken to take
advantage of ITC which was only available
on personal and other tangible property
• ITC issues were resolved through IRS
rulings and the courts
• At least 100 IRS rulings/cases on the
subject
• New Ruling in 2008
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Benefits of Cost Segregation
Studies
• Increased depreciation
in earlier years and/or
one time catch up in
one year
– results in less federal
and state income taxes
– results in increased
cash flow
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HCA Case (109 TC 21 (1997))
• Old ITC case law can be used in
determination of structural component vs.
personal property for purposes of
MACRS.
• Reaffirmed by IRS on its acquiescence.
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IRS Revenue Procedure 2008-52
• Allows a one year catch up on missed
depreciation deductions.
• Provides one year “windfall” for those who
where in error the first time
• Generally for buildings purchased or
constructed subsequent to 1986
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IRS Revenue Procedure 2008-52
• No need to amend returns previously filed.
• Automatic Accounting Method Change with
no fee for filing Form 3115.
• Form 3115 must be filed by the tax return
due date including extensions.
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IRS Revenue Procedure 2008-52
• Can provide cash flow windfall even
though the statute of limitations is closed
on the property construction or acquisition
year.
• Two tax years must be filed before
utilization of procedure – No longer.
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Case Study
• 71.4% of plumbing was process (medical)
• 56% of HVAC was process (medical)
• 73.5% of electrical was process (medical)
Additional depreciation Yr. 1 $230,000
Additional depreciation Yrs. 2-4 $745,000
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Potential of Reclassification
Type of Structure Percentage Misclassified
1. Retail 10-40%
2. Grocery Stores 15-40%
3. Office Building 10-15%
4. Hotels 20-40%
5. Warehouses 8-12%
6. Light Mfg 15-40%
7. Heavy Mfg 25-70%
8. Processing Plants 60-90%
9. Nursing Homes 15-30%
10.Restaurants 15-40%
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Connecticut, Prime High-rise
A 92 mil, 15 story office with a separate parking
garage and plaza wherein we located over 230
qualified assets. The results were 8.36 mil in 15-yr,
4.08 in 7-yr, and over 1.83 mil in 5-yr.
Alabama, Office Building
A 400,000 sq.ft. building leased to the U S
Government. In the 31 mil purchase price, we
located 4.35 mil in 15-yr, 2.6 mil in 7-yr, and 1.22
mil in 5-yr assets.
Case Studies
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Factors To Consider
• Profitability
• Partners / Shareholders of Pass-Thru
Entities
• Mid Quarter Convention
• Other Depreciation Elections
Previously Made on Tax Returns
• Like Kind Exchanges
