How a cost segregation study is prepared

Documentation

The work begins with reading. Before the building is visited, the preparer goes through everything the owner has sent: closing documents, the appraisal, drawings, the construction contract with its schedule of values, requisitions and change orders, the owner’s ledger, permits, and any existing depreciation schedule.

Public records fill some of the gaps. In New York City, Department of Buildings filings and certificates of occupancy help to date alterations. In New Jersey, municipal construction permits do the same. By the end of this stage the preparer knows what the records establish and what will have to be established at the building.

The site visit

The preparer typically inspects the building in person and records the visit on video, describing what is seen as it is seen. The route usually runs from the roof to the cellar: mechanical and meter rooms, common areas, amenity spaces, a representative selection of units, any commercial space, and the site outside the walls, including paving, lighting, fencing and landscaping. Equipment nameplates and finishes are photographed.

Because the recording is continuous and time-stamped, an observation in the report can be traced to the moment it was made instead of being reconstructed afterward from notes. Occupied spaces are entered only as the owner arranges.

Classification

Each component is then assigned to a class of property. The question in every case is whether the item is part of the building’s structure, a land improvement or personal property, and the answer depends on what the item is, how it is attached and what it serves.

The preparer works from the IRS Cost Segregation Audit Techniques Guide, the regulations, revenue rulings and procedures, and the court decisions that established the tests. Each classification in the report carries its citation. Items that could reasonably fall either way are identified as such, with the reasoning, so that your accountant can take a position with full information.

Reconciliation

Every dollar of the building’s depreciable basis has to land somewhere. The classified costs, the indirect costs allocated across them and the remaining structure are added up and tied to the total from the closing statement or the project ledger. Land is excluded on the basis of the appraisal or another source agreed with your accountant. A study that does not reconcile is not finished.

The report

The report describes the property and the documentation relied on, explains the method, and presents each classification with its cost, its authority and a reference to where the component was observed. A photographic record is included.

With it comes a fixed-asset schedule, delivered as a spreadsheet arranged the way your accountant works. The page for accountants describes the schedule, and the services page describes how the approach differs for new construction, acquisitions and look-back studies.

Workpapers

The documents received, the recording, the photographs, the quantity takeoffs and the calculations are retained for years after delivery. They are available to the owner and to the owner’s accountant on request.

The preparer

Studies are prepared by one person, who holds a Bachelor of Engineering degree from Stevens Institute of Technology, a Master of Business Administration from the Kelley School of Business at Indiana University, and an Engineer in Training certificate issued in New Jersey. The preparer’s professional background is in reviewing construction budgets, requisitions and change orders, and inspecting projects in progress, on behalf of lenders. The certificate is not a professional license, and Highbridge Studies does not offer engineering, architectural, appraisal, legal or accounting services.

The guide

The Cost Segregation Audit Techniques Guide is published by the Internal Revenue Service for its own examiners. It describes what the Service looks for in a study and in the person who prepares one. It is not law, and the Service does not approve or endorse studies or preparers. Highbridge Studies treats the guide as the standard its work is prepared to.

What a study is not

A study supports the depreciation your accountant reports. It does not decide how a return is prepared, and it cannot assure how any taxing authority will view one. It is not an appraisal of the property’s value and not an assessment of its condition. Those judgments belong to the owner and to the professionals the owner engages for them.