| Cost Segregation Article |
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In-House Cost Segregation Studies: What Is The Risk?
A recently published article discussed the risks associated with performing cost segregation studies in-house. Below is a reprint of the article. The original article can be found here.
Our cost segregation studies, reports and supporting workpapers satisfy the criteria set forth by the IRS.
A Cost Segregation Study performed in-house, by employees of the company, is often times reviewed with more scrutiny by the IRS. Here is the summary of the Boddie-Noell Enterprises court case:
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The two employees who conducted the original cost segregation study used an estimate of an existing study conducted by Hardee's Food Systems which indicated 24% of the assets qualified for ITC. They sent questionnaires regarding costs to contractors but didn't keep those records.
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The IRS examined the methodology and threw out the results of the study.
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The company took it to court and hired an individual cost segregation practitioner to conduct studies on 7 properties prior to trial.
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After examining the methodology, the court stated, "The methodology employed by plaintiff.... was at best, unusual." They also stated that the results of the 7 studies performed by the individual cost segregation practitioner appeared to be "based on after-the-fact speculations". The court also found a lack of contemporaneous evidence supporting the corporations' claims.
A couple of other important points from this case:
Cost Segregation studies should not be taken lightly. With the issuance of the IRS Cost Segregation Audit Techniques Guide in 2004, it shows that the IRS knows what separates a good study from a poor one. A study conducted by an independent firm is looked at more favorably than one conducted "in-house". However, it is not safe to assume that any independent cost segregation provider will do.
You can read about the most common cost segregation methodologies here.
Before deciding on a provider, we recommend that you ask to see a sample of their study so you can compare the methodology used and the level of detail provided.
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