Cost Segregation

What is a Cost Segregation Study?

Cost segregation is an IRS-endorsed means of calculating depreciation. It is a technical process where short-life items are separated from long life items. It typically doubles or triples depreciation during the first five years of ownership.

Breaking a large purchase down into its’ component parts doesn’t just result in potential tax savings on a shorter timeline: it also makes it easier to write off future replacements of individual components once current assets have lost their value. In other words, replacing piping or electrical wiring and depreciating the replacement is easier when it has already been singled out as an asset as part of a cost segregation study.

The IRS has actually published a Cost Segregation Audit Techniques Guide. The introduction to this guide points out that the number of segregation studies has increased sharply in recent years. In this guide, the IRS specifically states that a quality cost segregation study is one which is conducted by a qualified individual with “experience and expertise.”

Considering that the IRS has created an audit guide specifically for this asset allocation technique — combined with the fact that they clearly state how important it is for the professional who conducts the study to have both expertise and experience that they can bring to bear on the task — it’s essential to take this process seriously. The IRS audit guide also mentions repeatedly that the study should be engineering-based, and that a study conducted by someone with an engineering background is generally deemed to be more reliable than one conducted by someone without any such background.