There is no such thing as a simple "formula" for a cost segregation study. However, understanding the principal elements of a quality cost segregation study and report is especially important so that you can successfully execute a study.
Fortunately, there is guidance out there. It's called the IRS Cost Segregation Audit Techniques Guide (ATG). The purpose of the ATG is to provide guidance and steer IRS Auditors and taxpayers into the right direction of what would be considered a "quality" cost segregation study and report. "Quality" to the eyes of the IRS, is a report and study that is efficient and expedited during audit.
The ATG highlights the top elements that encompass a quality study and report.
Summary of what a quality cost segregation study and report entails:
- The study is prepared by a person(s) with knowledge of construction and tax law
- The methodology used is described along with the steps taken to classify assets and determine costs
- Proof of documents used to classify assets and determine costs
- Consistency across the board with data and costs
- Extensive legal analysis to support property classifications
- Reconciling total allocated costs to total actual costs for accuracy
- Reclassification of § 1245 Property and § 1250 Property
- An executive summary and/or letter
- Report describing the rationale of the study
- Breakdown, exhibit, and methodology used for all costs
The takeaway here: if your cost segregation study includes the above elements, you can expect that your study will have an efficient and successful outcome if it is audited.
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