IRS Position on Cost Segregation

The IRS developed the IRS Audit Techniques Guide (ATG) for Cost Segregation. The 100+ page ATG opines that cost segregation is a more accurate means of calculating depreciation instead of traditional methods. Some taxpayers have been apprehensive the IRS would view cost segregation as a gray area. Instead, the IRS prefers cost segregation to other methods because it is more accurate.

The Tax Cuts and Jobs Act of 2017, which provides for expensing property with a life of 20 years or less in year 1, magnifies the benefits of cost segregation roughly five-fold.

Since the Tax Cuts and Jobs Act of 2017 is statutory, the IRS is not concerned by taxpayers deducting short-life property in year one, even though the result is a massive amount of depreciation.

Many taxpayers who use bonus depreciation during 2018 to 2022 will pay no income taxes for a decade or more.

Information from the Audit Techniques Guide on Cost Segregation and the need to identify the correct life of assets acquired:

The following is a direct quote from the IRS Audit Techniques Guide for cost segregation. It is clear that the IRS states,

“to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset (emphasis added)”

The primary means of “determining the proper recovery period” is by conducting a cost segregation study. The purpose of a cost segregation study IS to identify the value of assets with varying lives, typically 5, 7, 15, 30 and 40 for real estate.