Being in the cost segregation industry, we’ve heard our fair share of misconceptions and misunderstandings. The reality is, cost segregation is a gem of a tax planning strategy that can be highly beneficial if taken advantage of. Don’t let your doubts hold you back. To clear up any confusion, we’re debunking the top misconceptions of cost segregation. Check out the below myths versus facts. See any you’re familiar with?
Does Cost Segregation Have to be Done During the First Year of Purchase?
Contrary to the belief, you can do cost segregation anytime during ownership. Although it is recommended to do cost segregation as soon as possible to reap maximum benefits, you can play “catch-up” with the depreciation you may have missed. It is important to note that, in order to do this you must file a Form 3115 (Change in Accounting Method).
Are CPAs the Only Ones Who Can Complete a Cost Segregation Study?
While we partner with CPAs to provide cost segregation services to their clients, the IRS Cost Segregation Audit Techniques Guide says that a study completed by someone with construction and engineering knowledge is better than someone without. It is important that the preparer has experience in cost estimating, allocation and tax law.
Will a Cost Segregation Study Increase My Audit Risk?
Simply completing a cost segregation study will NOT increase your audit risk. However, if you are audited and your methodolgies and procedures are not well documented
Can I do Cost Segregation on My Property if I am Planning on Selling it?
If you haven’t filed taxes and reported the sale, you can still conduct a cost segregation study.
Is Cost Segregation Worth It If The Value of the Building is Too Low?
This topic is quite misunderstood as many believe that cost segregation can only be done on buildings over $1 million in basis. In fact, cost segregation can be done on a building with a basis as low as $200,000. Sure the benefit may not be as large, but you’re leaving money on the table if you don’t take advantage. Just make sure with your CPA that you can utilize the benefit, as everyone’s tax situation is different!
What kind of project qualifies for Echo Lite?
Our requirements for an Echo Lite project are as follows:
- The property needs to have a depreciable basis of less than $500,000
- There needs to be a land valuation split out from the building
- There can’t be any renovation/improvement assets included with the study
Do you have an example report I could look at?
Unfortunately we are unable to provide a redacted or blank deliverable for security reasons. We are more than happy to explain in detail what can be expected within our deliverables though.
What is included in your deliverables?
For a full study, our deliverable will include a full itemized breakdown of quantities for all materials and items for the property. The deliverable will have the legal analysis breakdown for each item/material so you can see how each was reclassed. We will provide a summary and display the overall benefit and tax savings. We also provide a 3115 attachment with suggested inputs if a 3115 is applicable on the project.
On an Echo Lite, we provide a reclass percentage breakdown for 5, 7, and 15 year buckets. We also provide the benefit amount and tax savings, and a 3115 attachment if applicable.
After I subscribe, what is the next step?
Once subscribed to Echo, you will have access to the Learning Academy for informational purposes, and the software platform where you can set up your property or properties. Once the properties are set up, you can run a high level benefit estimate with no commitments. An engagement letter will be produced with the benefit estimate so if you decide to move forward with a study, you can engage on the project.
Can a CPA perform the legal analysis on a full cost segregation study?
If a CPA is comfortable or has experience performing the legal analysis for a cost segregation study, they can absolutely take on this piece of a project and we can scope the fee accordingly. We also offer Legal Analysis training to any CPA with interest. Set up a call with us and we can discuss what is included with the training session.
