Palmetto Cost Segregation, LLC conducts its cost segregation studies in accordance with the IRS-published Cost Segregation Audit Techniques Guide (“ATG”) and the Minimum Quality Standards (“MQS”) published by the American Society of Cost Segregation Professionals (“ASCSP”).
To learn more about how Palmetto Cost Segregation, LLC applies the industry guidelines for quality and incorporates the client's needs of today and tomorrow into its cost segregation process, click on one of the links below.
To learn more about cost segregation in general - the history, purpose, process - continue scrolling.
THE PCS MODEL
COST SEGREGATION SERVICES
Financial benefits, such as increased cash flow and minimized tax liabilities, are not the only source of benefit from a cost segregation study.
The IRS describes a "quality" study as one that is accurate and well documented. PCS employs methodologies designed to meet the IRS' standards for quality
Designed not only to meet industry standards for quality but also to meet the client's current and future needs, the deliverables are QUITE the difference.
PALMETTO COST SEGREGATION, LLC
The Purpose of Cost Segregation
The purpose of cost segregation is to identify property eligible for a shorter recovery period. Generally, when a taxpayer acquires or constructs commercial real property, the entire cost is depreciated over 39 years (or 27.5 in the case of residential real property such as apartment complexes). A cost segregation study is a methodical process of identifying components of the building which are more properly treated as land improvements or tangible personal property. Once the items have been identified, a cost segregation study assigns the appropriate asset classification in accordance with Revenue Procedure 87-56 and IRC §168. The asset class determines the appropriate method, convention, recovery period, and eligibility for bonus depreciation.
How is the determination made that property is eligible for a shorter recovery period?
As the IRS states in its Audit Technique Guide, "It cannot be overemphasized that the classification of assets is a factually intensive determination. There are no bright-line tests for segregating property into § 1245 property and § 1250 property classifications." However, the ITC was heavily litigated and, as a result, produced a myriad of legislative acts, court decisions and Service rulings. Over the years, the following tests have evolved for determining if an item constitutes tangible personal property:
1) Whether the item is considered accessory to a business;
2) Whether the item is inherently permanent; and
3) Whether the item is ornamental or decorative or if it serves the overall operation and maintenance of the building.
A qualified cost segregation specialist is well-versed in the applicable tax authority. During the study, the provider will observe and document an asset's use, its manner of attachment, and it relationship to the general function of the building in order to properly classify the asset and clearly document the supporting law.
What types of property qualify as land improvements?
Parking lot paving and striping, sidewalks and curbing, landscaping and irrigation, fencing and gates, concrete pads and aprons, storm drainage, canals and waterways, docks and wharves, bridges, pools, gazebos are a few examples of commonly observed land improvements.
What types of property qualify as tangible personal property?
Non-permanent floor coverings (e.g., carpet, vinyl tile)
Non-permanent wall coverings (e.g., vinyl wall covering, wallpaper)
Certain cabinetry and millwork
Special-use doors (e.g., traffic or impact doors)
Dedicated support structures or foundations for machinery and equipment
Moveable and reusable interior partitions
HVAC systems or components that meet the sole justification test (e.g., installed to meet temperature or humidity requirements of machinery, equipment or business activity)
Fire protection systems or components which protect a particular item of machinery or equipment or relate to a hazard created by the business activity of the taxpayer
Process plumbing (e.g., connections, fixtures and related water/waste piping which serve tangible personal property)
Process mechanical (e.g., specialized exhaust systems which are necessitated by activities of the taxpayer and do not relate to the general operation and maintenance of the building)
Certain light fixtures
Process electrical (e.g., devices - outlets, receptacles, junction boxes, etc.), related wiring and conduit, and an allocable portion of the primary and secondary electrical systems which serve tangible personal property.
How is the appropriate asset classification determined?
The classification of property under MACRS is important because it affects the applicable depreciation method, recovery period, and convention. Each item of property depreciated under MACRS is assigned to a property class, which establishes the item's recovery period. The applicable recovery periods for MACRS are determined by statute or by reference to class lives. Class lives for MACRS are set forth in Rev. Proc. 87-56. Numerous applicable asset classes are currently determined by statue, including Qualified Leasehold Improvement Property, Qualified Restaurant Property, Qualified Retail Improvement Property, and introduced in 2016 - Qualified Improvement Property.
The Process of Cost Segregation
A Brief History
The concept of segregating costs between building costs and personal property is not a new concept. In fact, this concept has existed for over 50 years. The predecessor to present day cost segregation was the Investment Tax Credit ("ITC") which Congress enacted in 1962. Designed to stimulate the economy, a credit was allowed for certain qualified property, known at the time as "Section 38 Property". In order to take advantage of this business incentive, companies had to segregate costs between qualifying and non-qualifying property, or between buildings and structural components, and "tangible personal property" and "other tangible property".
The Tax Reform of 1986 introduced many changes to the tax code, including the repeal of the ITC, the introduction of the Modified Accelerated Cost Recovery System (MACRS), and the abolishment of component depreciation. Under MACRS, the recovery period for buildings and structural components increased drastically, and proper asset classification became crucial because, under this new system, the asset class would dictate the appropriate method, convention and recovery period.
In 1997, a landmark court decision was reached in Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) ("HCA"). In this case, depreciation was taken on certain items located in the taxpayer's hospital facilities using a 5-year recovery period based on the classification as tangible personal property. The IRS disagreed with the taxpayer's treatment, claiming the items were structural components and further asserting the segregation of costs constituted component depreciation, which was no longer allowed under the IRC of 1986. The Tax Court disagreed. As a result of this ruling, cost segregation methodologies previously used to allocate cost between qualifying and non-qualifying property under the Investment Tax Credit (ITC) property could now be used to classify costs as IRC §1250 or §1245 property in order to determine the proper depreciation of assets.