Building a Good Defense Case

By: Paige Eaton

It’s a no-brainer that cost segregation studies can create a substantial cash flow for your business. But the risk associated with decreasing your tax burden can be an unwanted audit from the IRS. Building a good defense is the only way to diminish the risk. The methods that provide a sense of security are as follows:

1.) Reliable Depreciation Guides:

Outside sources like Wolters Kluwer CCH “U.S. Master Deprecation Guide” is one example. This book entails an in-depth review of federal tax laws that pertain to the treatment of depreciation in numerous circumstances.

IRS resources like the IRS Field Directive on the Planning and Examination of Cost Segregation Issue in the (Restaurant, Retail, Auto Dealership, etc.) Industry. This guide is tailored to various industry types, breaking down the differences between Section 1250 and 1245 for several building components.

2.) Acceptable Cost Estimating Practices:

The premise of a cost segregation study is the identification and calculation of component values that qualify for accelerated depreciation. It is important to use a reputable cost index provider that gathers their component costs from numerous cities and industries.

3.) Good Notes:

Note taking is a must, in order to build a solid defense. The objective in good note taking is that any person can review the project and be capable of following the methodology. In the event of an audit, the project notes become a legal document that provides support for the final report. Not only is note taking an important part of building a defense, but it also reveals underlying problems. And it is imperative that the entire scope of the project is known in order to formulate a proper solution.

4.) Final Report:

A good quality report summarizes the project in a well laid out and easy to follow approach. The final report identifies the introduction, methodology, component details, and conclusion. The final report is also a legal document when faced with an audit and provides assurance that the proper practice was utilized for the project.

Find rest in knowing that your cost segregation is developed in a through manner that withstands the scrutiny of an IRS audit.

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