Triple Benefit: Cost Segregation, 179D Deduction, and the ITC Credit  

Your Cost Segregation Study will only be as good as the company that performs it.  

Today there are a plethora of providers vying for attention, and some taxpayers still choose to perform their own study or have their CPA perform it.  

So, if you’re considering a Study, you’re likely evaluating the following three options:  

1. DIY, with or without a Software-Based Provider (SBP) 
2.  Turning to Your CPA 
3.  Working with a Third-Party Cost Segregation Provider 

Let’s consider the options more closely:  

OPTION 1: DIY, with or without a Software-Based Provider 

This probably isn’t the best choice for most taxpayers.  

Unless you have an extensive background in construction, engineering, and tax law, you’ll probably:  

• Overlook some eligible building assets, thereby missing out on much potential benefit 
• Make some mistakes in classifying assets or calculating depreciation, thereby opening yourself up to IRS scrutiny 

The DIY approach gives you sub-par results and puts you at risk. 

A quality cost segregation study requires the skills and experience of a trained engineer. 

Engineers must draw on their knowledge of construction methods and related costs as they meticulously work their way through a project site, laboring to account for every possible asset. During the site visit, engineers will perform a forensic analysis of the property’s unique details. Then assets will be “broken–out,” assigned costs, and finally placed in the appropriate class–life category. Study results must then be analyzed from tax and technical perspectives, to ensure complete accuracy and compliance with IRS–regulations. 

In fact, the IRS’ Cost Segregation Audit Techniques Guide lists 13 “Principal Elements of a Cost Segregation Study.” The very first element is “Preparation by an Individual with Expertise and Experience,” and the Guide explicitly states that: “… a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background.” 

In short, studies should be performed by experienced engineers who can provide reports that maximize savings while remaining defensible in the unlikely event of an audit. 

OPTION 2: Turning to Your CPA  

In some situations, your CPA firm may indeed be able to perform a Cost Segregation Study. These firms are generally very large, with engineers right on staff.  When possible, this can be an excellent choice.    

OPTION 3: Working with a Cost Segregation Consultant   

However, it’s not always possible.  

Most firms don’t have the resources to manage a full in-house cost segregation department, and often choose to work with a third-party Cost Segregation Provider.  

If you find yourself considering Cost Segregation Providers, it’s important to do your homework.   

The Best Cost Segregation Companies: Features to Look For  

• Multidisciplinary team composed of tax and technical professionals  
  • You want to see engineers, CPAs, accountants, and attorneys on the team 
• Experience with your specific property type  
  • Some firms have lots of generalized experience, but aren’t familiar with unusual verticals that differ from the norm
  • If you need a study done on an equestrian center, a motorsport club, or a luxury treehouse, your provider must be familiar with the associated rules/features that apply 
• Solid working relationships with CPA  
  • The best cost segregation companies respect the primacy of the Client-CPA relationship, working closely with both entities to get the best results  
  • Ideally, a cost segregation consultant will also help proactively identify and integrate additional tax incentives into an existing strategy  
  • You should also look for a cost segregation provider who will provide education and resources for CPA support  
• Complimentary feasibility analysis  
  • Good cost segregation firms offer a no-cost estimate of benefit that lays out short and long-term potential  
  • Great cost segregation firms speak to these estimates candidly – if a study isn’t worth doing, they’ll tell you so
• Meticulous site visits, with engineers working slowly and methodically to assess all assets 
  • Even the small items add up – you want a provider that documents everything, down to the smallest outlet  
• Detailed and accurate reports that are in compliance with IRS guidance and case law, including the aforementioned “13 Principal Elements” listed in in the Cost Segregation Audit Technique Guide
  • The report should include an itemized accounting of all assets with assigned values and depreciation class lives that ties back to the building’s total spend  
  • Ideally, the firm will rely on RS Means for more comprehensive costing and unit pricing whenever possible. (Marshall and Swift cost data may be used when necessary, but is geared more for appraisals.)
• Efficient report delivery 
• Support in the unlikely event of an audit  
  

Taxpayer Beware: Red Flags to Avoid 

• Firm tries to sell you other, unrelated services – like investing 
• Firm suggests a percentage-based fee 
  • The IRS states that providers are disallowed from having any interest in the study results — compensation cannot be based on the findings 
• Firm says they don’t really need to do a site visit – whether in person or virtual – they can just “estimate” 
• Firm does a site visit – but assures you they’ll be in and out in no time 
  • Identifying, quantifying, and documenting all building assets takes time.  Engineers take copious notes and may take hundreds of photographs  
  • Depending on building size and complexity, a thorough site visit may take 3-6 hours or longer 
• Firm delivers a thin report 
  • A short report means corners were cut. When done right, a cost segregation report with full documentation can be over 100 pages long
    

An Important Final Caveat 

Too many taxpayers get hung up on up-front fees, and miss out on bigger tax benefits down the road.  

Pricing is important, certainly, but the higher fee associated with a quality study will likely be negligible in light of the additional benefit.  

Consider a taxpayer out of Tampa, who initially considered using a software-based provider (SBP) their CFO recommended: 

• SBP’s estimate: $250K of assets may be accelerated 
• Capstan’s estimate: $430K of assets may be accelerated  

Yes, Capstan’s fee was $2K higher, but this was clearly inconsequential considering the additional $65K in benefit achieved.  

Again, a Cost Segregation Study is only as good as the firm that performs it. Taxpayers are encouraged to put serious thought into the company they keep.