Cost Segregation Techniques
By: Lee Shreve
“How much does a cost segregation study cost?” is often the first question asked by a potential client to a cost segregation study provider. However, what a client should ask is, “What method of cost segregation do you use in performing a cost segregation study?” The Cost Segregation Audit Techniques Guide has a chapter devoted to the six common approaches that may be used when performing a cost segregation study. The six methods do not provide the same level of value, reliability, or accuracy. In fact, the approaches are presented in descending order of value and accuracy as a reference to how an examiner reviews a cost segregation report.
Common Approaches for Cost Segregation Studies:
- Detailed Engineering Approach from Actual Cost Records
- Detailed Engineering Cost Estimate Approach
- Survey or Letter Approach
- Residual Estimation Approach
- Sampling or Modeling Approach
- “Rule of Thumb” Approach
The “preferred method” to receiving a quality study based on the order is an engineering-based approach. A cost segregation company performing an engineering-based report reviews actual cost records and construction documents, and a site visit is conducted to analyze a commercial building’s components. The use of the engineering-based method provides an overall accuracy of the cost allocations contained in the study.
Attention to detail used in the methodical engineering-based approach to a cost segregation study brings significant value in both depreciation expense and compliance. The other approaches skip details such as a site visit and the use of building plans, which are used to provide accuracy to the client’s tax application. So, ask yourself, “Why would I use any method but the engineering-based method?” If the answer is based on price alone, you end up reducing your return on your cost segregation investment with less depreciation expense and increased scrutiny the Service. Also, consider that an approach that yields accuracy will expedite the Service’s review of your study, which will save you time and money.
At CSSI, we have completed over 20,000 engineering-based studies for commercial property owners across the United States. We are the premier company providing quality, affordable cost segregation studies. Contact us today to receive a no-cost preliminary analysis with your estimated tax savings.