All information provided below comes from the IRS’s Cost Segregation Audit Techniques Guide, which can be found at the following address: http://www.irs.gov/businesses/article/0,,id=134180,00.html PLEASE NOTE: Audit Technique Guides are not to be taken as law or as the authoritative definition of a given topic. However, as their names suggest, they are guidance for IRS examiners in the case of an audit or other scrutiny. As such, they can provide great insight for tax professionals as to how best to go about conducting tax studies and preparing reports. www.costsegs.com • [email protected] • 877-633-9840 CHAPTER 1 -INTRODUCTION .................................................................................................................... 5 PURPOSE OF THE COST SEGREGATION AUDIT TECHNIQUES GUIDE ............................................................ 5 BACKGROUND ......................................................................................................................................................... 5 SUMMARY AND CONCLUSIONS ............................................................................................................................ 6 CHAPTER 2 - LEGAL FRAMEWORK .......................................................................................................... 7 OVERVIEW ............................................................................................................................................................... 7 BULLETIN F .............................................................................................................................................................. 7 COMPONENT DEPRECIATION ............................................................................................................................... 7 ASSET DEPRECIATION RANGE (ADR) .................................................................................................................. 8 ACCELERATED COST RECOVERY SYSTEM (ACRS) ........................................................................................... 8 MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) ..................................................................... 8 EXPENSING PROVISIONS AND BONUS DEPRECIATION - IRC §§ 168, 179, AND 1400L .................................. 9 WHAT IS TANGIBLE PERSONAL PROPERTY? ...................................................................................................... 9 INVESTMENT TAX CREDIT - IRC § 48 .................................................................................................................... 9 TANGIBLE PERSONAL PROPERTY ..................................................................................................................... 10 BUILDINGS AND STRUCTURAL COMPONENTS ................................................................................................. 10 SECTION 1245 AND SECTION 1250 PROPERTY ................................................................................................ 11 FUNCTIONAL USE TEST ....................................................................................................................................... 12 INHERENT PERMANENCY TEST AND THE "WHITECO FACTORS"................................................................... 12 REPEAL OF ITC AND COMPONENT DEPRECIATION ......................................................................................... 13 HOSPITAL CORPORATION OF AMERICA v. COMMISSIONER ("HCA") (1997) .................................................. 13 ACTION ON DECISION .......................................................................................................................................... 14 CHIEF COUNSEL GUIDANCE ............................................................................................................................... 14 LACK OF BRIGHT-LINE TESTS FOR DISTINGUISHING § 1245 AND § 1250 PROPERTY ................................. 14 SUMMARY AND CONCLUSIONS .......................................................................................................................... 15 CHAPTER 3 - COST SEGREGATION METHODOLOGIES ...................................................................... 16 INTRODUCTION ..................................................................................................................................................... 16 WHAT ARE THE MOST COMMON METHODOLOGIES UTILIZED FOR COST SEGREGATION STUDIES? ...... 16 WHAT ARE THE ATTRIBUTES OF VARIOUS COST SEGREGATION METHODOLOGIES? .............................. 16 WHAT METHODOLOGY IS REQUIRED BY THE IRS? ......................................................................................... 19 SUMMARY AND CONCLUSIONS .......................................................................................................................... 19 CHAPTER 4 - PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION STUDY AND REPORT .................................................................................................................................................................... 20 INTRODUCTION ..................................................................................................................................................... 20 WHAT IS A "QUALITY" COST SEGREGATION STUDY? ...................................................................................... 20 www.costsegs.com • [email protected] • 877-633-9840 PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION STUDY ............................................................ 20 PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION REPORT.......................................................... 24 SUMMARY AND CONCLUSIONS .......................................................................................................................... 25 CHAPTER 5 - REVIEW AND EXAMINATION OF A COST SEGREGATION STUDY ............................... 26 INTRODUCTION ..................................................................................................................................................... 26 STEPS FOR REVIEWING A COST SEGREGATION STUDY AND REPORT ........................................................ 26 SUMMARY AND CONCLUSIONS .......................................................................................................................... 37 APPENDIX - CHAPTER 6.1 - UNIFORM CAPITALIZATION ..................................................................... 38 INTRODUCTION ..................................................................................................................................................... 38 APPLICATION OF THE CAPITALIZATION RULES UNDER IRC § 263A .............................................................. 38 Capitalization of Costs under IRC § 263A(a) ........................................................................................................... 38 Capitalization of Interest under IRC § 263A(f) ......................................................................................................... 39 APPENDIX - CHAPTER 6.2 - CHANGE IN ACCOUNTING METHOD ...................................................... 41 INTRODUCTION ..................................................................................................................................................... 41 HISTORICAL SERVICE POSITION ........................................................................................................................ 41 RECENT LITIGATION ............................................................................................................................................. 41 NEW REGULATIONS ............................................................................................................................................. 41 LOOK-BACK STUDIES ........................................................................................................................................... 42 SUMMARY AND CONCLUSIONS .......................................................................................................................... 43 Table 1 - Revenue Procedures Relative to Cost Segregation Studies .................................................................... 44 APPENDIX - CHAPTER 6.3 - DEPRECIATION OVERVIEW ..................................................................... 45 INTRODUCTION ..................................................................................................................................................... 45 HISTORICAL BACKGROUND - A BRIEF RECAP .................................................................................................. 45 GUIDELINES FOR THE CLASSIFICATION OF ASSETS - MACRS ...................................................................... 45 APPENDIX - CHAPTER 6.4 - RELEVANT COURT CASES ...................................................................... 51 INTRODUCTION ..................................................................................................................................................... 51 ARRANGEMENT OF INFORMATION .................................................................................................................... 51 CASE CITATIONS .................................................................................................................................................. 51 TABLE BY CASE NAME ........................................................................................................................................