Cost Segregation is a hidden jewel in which the IRS gives you, the property owner; an opportunity to maximize the return on your investment. Cost Segregation has been around since JFK signed it into law to help stimulate the economy back in 1963. Then in 2008, it was extended to go back five years instead of two, as part of the stimulus plan. That expired in September 2010; all property owners should be looking into Cost Segregation, because you can still go back two years to recapture over paid taxes.
A cost segregation study will identify items that can be properly classified as tangible personal property or land improvements; rather than real property that is depreciated over 27.5 or 39 years. The resulting tax benefits begin in the quarter the study is complete and continue throughout the depreciable life of the identified assets. Most fortune 500 companies use this in their tax strategy.
The Internal Revenue Service (IRS) states in their audit manual that it is their expectation that property owners and accountants will become more exposed to this type of depreciation see the benefits, and thus, they expect to see an increase in these studies. Over the last few years, companies have been claiming they do these studies, but in fact they only do a partial study just doing a base cost segregation study. This is not what the IRS considers a "Quality Study." Per IRS guidelines, there are 13 items or parts, to what they consider a "Quality Study." The last thing you, the property owner, want is to have an audit by the IRS,or invest in this study and only get half of a job done!
If a respected company does your Cost Segregation study and does a complete job, that would include an onsite engineers report then you do not have to worry. Reports from a good company are a very acceptable type of depreciation and recommended by the IRS. However, only five percent of commercial property owners use this tax strategy, because they have a lack of knowledge about them or do not have the experience in these studies to perform them. These reports exist to assist your accountant to enhance his or her ability to lower your income tax liability to give you an option on tax strategy.
Cost Segregation works best when the property has been in service for ten years or less. Over the years it has been changed; in some cases for the better and others,not. After certain cases such as Hospital of America vs. Commission, it implemented many of the old laws into a very strategic tax strategy.