IRS Revised Cost Segregation Audit Technique Guide

Feb 7, 2023 – The Internal Revenue Service published a revised Audit Technique Guide (ATG) in June of last year to assist examiners in the review and examination of cost segregation studies.

Updates were necessitated due to changes in the tax law from the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, the Tax Cuts and Jobs Act (TCJA) of 2017, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021. Topics updated include Section 263A, Change of Accounting Method, Depreciation, Bonus Depreciation, Sections 179 and 179D deductions, and Qualified Improvement Property (QIP).

Cost segregation studies are most commonly prepared for the allocation or reallocation of building costs to tangible personal property. A building – Section 1250 property – is generally non-residential real property (39-year) or residential rental property (27.5-year) eligible for straight-line depreciation. Equipment, furniture, and fixtures – Section 1245 property – are tangible personal property. Tangible personal property has a shorter recovery period (e.g., 5 or 7 years) and is also eligible for accelerated depreciation (e.g., double declining balance, bonus depreciation and Section 179 deduction). Therefore, a faster depreciation write-off (and tax benefit) can be obtained by allocating property costs to Section 1245 property.

Depreciation issues involving cost segregation studies cross all Large Business and International (LB&I) industry lines and impact Small Business and Self Employed (SB/SE) taxpayers as well. The lack of consistency in cost segregation studies and the absence of bright-line tests for distinguishing property contribute to the difficulties of this issue. In short, the purpose of the updated ATG is to provide the foundation to a better understanding of cost segregation studies and to provide the examination steps that will facilitate the audit process and minimize burden on taxpayers, practitioners, and Service examiners alike.

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