CostSegPlus™ is a Service of


1880 Century Park East #200
Los Angeles CA 90067-1600
Tel: 310.289.9888
Fax: 310.289.8186
Email: info@GerberCo.com

 


 

Basic Elements of Cost Segregation

A properly prepared cost segregation analysis must comply with strict IRS requirements. It is definitely more than an accounting exercise or arbitrary allocation of direct and indirect costs. The best cost segregation team must thoroughly understand tax law; possess construction and engineering knowledge; and, qualify as experts in defending their work upon IRS reviews or in Tax Court.

As part of the cost segregation, experts must answer two key questions, as follows:

Q: Function/use test - does the asset serve any purpose in the building operation? If not, it may be depreciated as part of the equipment.
Q: Inherent permanency test - can the property be easily removed or is the damage to the structure or the item too severe that this movement is not viable? The Tax Court (in Whiteco Industries, Inc.) has created six questions to assist taxpayers in applying the permanency test:
   
1. Is the property capable of being moved, and has it in fact been moved?
2. Is the property designed or constructed to remain permanently in place?
3. Are there circumstances that tend to show the expected or intended length of affixation?
4. How substantial a job is the removal of the property, and how time consuming is it?
5. How much damage will the property sustain upon removal of the property?
6. What is the manner of affixation of the property to the land?


Some components of a building are attributable to both real property and personal property. For example, certain portions of the wiring and plumbing in a building are properly attributable to the general operation and function of a building. Simultaneously, other portions of wiring and plumbing perform functions specifically allocable to a particular piece of equipment or machinery