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
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