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Cost Segregation

In the last few years, cost segregation has become very popular with small business owners. Call segregation is the process whereby you segregate the cost of the build out on a building, or just the cost of the building that you buy. Call segregation has become very popular, due to the favorable depreciation rules.

What a Cost Segregation Study tries to determine is different costs of all of the improvements of the building, segregating them so that they can have the favorable depreciation rules. Some of those rules include IRC §179 deductions that allow you to recover the full cost of an item that you put in service in the current year. There is also something called bonus depreciation, which allows you to deduct 50% of the cost of any improvements that you make to the building. This allows for a greater tax deduction, then you would normally get if you did not segregate the costs.

Accountants are notorious for being lazy. They lump all assets together, and have them be recovered over a period of time that is not favorable to their client. Now I personally, don’t do that. I segregate all the costs, and of course charge for it. The problem is that clients don’t want to pay me to do that. The same reason other accountants don’t segregate the costs. However, as I said the depreciation rules are favorable. So I do it for my clients.

There’s been a major hit, to the cost segregation world. Legal advice issued by IRS attorneys, have concluded that short-lived assets, in a major construction project no longer qualified for the 50% bonus depreciation.

To explain the impact of this you have to understand two different things. A turnkey operation, and design bid build out. These are very different operations. Design bid build out operations, not been affected. It is the turnkey operations that the IRS is a problem with. With turnkey operations, the problem is that construction does not commence with the taxpayer. Somebody else has started the process. Hence the name turnkey. The Internal Revenue Service’s attorneys proclaimed that turnkey operations did not qualify for the 50% bonus depreciation because construction did not commence with the taxpayer.

Just like every challenge, there will be an appeal. Where there should be an appeal, the taxpayer properly represent. If I was representing the taxpayer I would certainly appeal this, on the basis that it doesn’t matter if it is a turnkey operation or design bid build out operation. The reason for my argument would be construction still commences regardless of who started it.

CWSEAPA® Consulting, LTD one of our companies does cost segregation studies. For now, until an appeal is done, in a final determination made, we will go with what the IRS’s say. However, this appeals to go all the way to the United States Tax Court. I will watch and keep everybody posted on this. This is a major hit to an industry that is booming.

For more information on cost segregation, you can visit our website at

If you have any questions you can email Craig W. Smalley E.A., C.E.P.®, C.T.R.S.®

Admitted to Practice Before the Internal Revenue Service

Certified Estate Planner®

Certified Tax Resolution Specialist®