Cost segregation studies can offer real estate purchasers incredible tax benefits from accelerated depreciation. For purchasers of new or existing buildings, this can be a great tax tool to improve cash flow for other projects or investments. To realize that benefit, it is important to go through the right process to calculate the accelerated depreciation and substantiate your cost segregation benefit.
At Calvetti Ferguson, the Cost Segregation Study (CSS) process revolves around three main phases.
Phase 1: Free Initial Consultation and Benefit Estimate (1-2 weeks)
When a taxpayer approaches us about any tax incentive, our initial role is to make sure the tax incentive truly offers value to the taxpayer. A CSS does not always result in a valuable benefit, so we evaluate their unique tax and building scenario before we move forward. Our ultimate objective during this phase is to provide a fee and benefit estimate so the taxpayer can evaluate if the cost benefit is right for them.
During this initial phase, our cost segregation experts evaluate the client’s opportunity by analyzing a few key pieces of information such as the most recent tax return, depreciation schedule, closing statement, and when the building was placed in service. From this documentation and a brief conversation, we will generate an estimated range of the benefit and a fee for the services to be completed.
Phase 2: Documentation and On-site Verification (2-3 weeks)
Once an agreement is in place, we request several pieces of supporting documentation that include, but are not limited to:
- Purchase contract
- Closing statement
- General ledger spreadsheet
- GC’s final pay request
- Plat map
- Tax assessor document
- Inspection report
- Utility bills
These documents do not always exist, nor are they all required; however, these documents resemble what would be requested in an IRS audit and are a part of our due diligence to ensure the CSS is fully supported and substantiated where possible. Once we have received and reviewed all the documentation available, we need an On-Site Verification (OSV) to survey the property (inside and outside), inventory the components of the property, and photograph the various spaces. This step is required to build out the study and support the construction cost estimating necessary to segregate the various building components. During the OSV, we request that someone is available for questions, if needed, however, most of the work is done autonomously with little interruption to surrounding operations. Typically, the OSV takes two people one to two full days to complete.
Phase 3: Construction Cost Estimating and Final Report (2-3 weeks)
During the final phase of a CSS, we may have some follow-up questions and requests, however, the bulk of the lift is out of the taxpayer’s hands. We partner with engineers to evaluate the documentation, photos, and property data. This information is analyzed to calculate the replacement cost new, and ultimately reclassify the components to their appropriate asset life. Following the completion of this phase, the taxpayer’s cost segregation final report, along with the necessary tax filing information, is drafted and reviewed by the taxpayer. Upon approval, this report is finalized and delivered to mark the conclusion of the CSS.
Are you interested in a Cost Segregation Study? Visit our webpage for more information.