Internal Control of Fixed Assets: A Controller and Auditor's Guide

APPENDIX

Excerpt of Internal Revenue Service Cost Segregation Audit Guide

SHOWN HERE IS A small section from the Internal Revenue Service’s (IRS’s) Audit Guide on Cost Segregation.

INTRODUCTION

Cost segregation studies are conducted for a variety of reasons (e.g., income tax, financial accounting, insurance purposes, property tax). For income tax purposes, a cost segregation study involves the allocation (or reallocation) of the total cost (or value) of property into the appropriate property classes in order to compute depreciation deductions. The results of a study are typically summarized in an accompanying report, although there is no standard format for either the study or the report.

The methodology utilized in allocating total project costs to various assets is critical to achieving an accurate cost segregation study. Some of the more common methodologies, and their potential drawbacks, are summarized in this chapter. This discussion should assist the examiner in evaluating the accuracy of a particular study and in performing a risk analysis with respect to the depreciation deductions based on that study.

WHAT ARE THE MOST COMMON METHODOLOGIES UTILIZED FOR COST SEGREGATION STUDIES?

Various methodologies are utilized in preparing cost segregation studies, including the ...