Myth: My accountant already makes sure I get all allowable depreciation
Reality: As we all know, IRS rules and regulations are extremely complex. Cost segregation involves not only specialized tax law knowledge, but construction engineering expertise such as the ability to read blueprints and building specifications.
Even if your accountant understands the basics of cost segregation, performing cost segregation without engineering or construction expertise along with a deep understanding of the relevant tax law changes, IRS Private Letter Rulings, and court cases, valuable tax benefits will certainly be missed. IRS cost segregation audit guidelines clearly state that:
“a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background.”
In contrast, an accountant’s ad-hoc cost segregation calculation or reliance on a contractor (who typically is familiar neither with a subcontractor’s cost for specific property items nor the tax law) is a recipe for disaster on examination.
Myth: A cost segregation study is an inconvenience and costs too much money
Reality: In the early days of cost segregation this might have been true, especially for owners of smaller commercial buildings. However, Ahura Group is proven to be priced competitively. Our experience and methodology have brought costs within reach of the vast majority of commercial property owners. Further, the time and effort involved on the part of building owners or managers is minimal. Our process is seamless to your organization. And the savings can be substantial for any owner who pays federal income taxes. Typically 5% to 10% of the real estate investment cost.
Myth: It's too late to change the depreciation on our building
Reality: Many owners and their accountants think that once they have established an accounting method they are locked into that way of depreciating their building. This myth keeps many owners from realizing one of the key advantages of cost segregation. From the perspective of the IRS, an owner who applies cost segregation is changing from an incorrect method, straight line, to a correct method, component depreciation. Not only is this change in method permitted, approval is automatic once a qualified cost segregation study has been performed and the building owner has completed and submitted an IRS form 3115. What’s more, IRS rules allow you to realize all of the depreciation adjustment for prior years in the year the study is completed, which can mean an immediate and significant increase in cash flow.
Myth: Doing a cost segregation study will trigger an audit
Reality: After more than 75 IRS rulings, procedures, and court cases, the validity of cost segregation studies has been upheld. Also, the IRS has published detailed audit guidelines and field directives for performing and documenting studies. In the unlikely event of an IRS challenge, Ahura Group will provide you with full audit support at our expense, to defend every aspect of any study we complete.
Myth: Some taxpayers are reluctant to use cost segregation, equating it with a high-risk tax shelter
Reality: In truth, this reluctance is misplaced. If the cost of the components in the engineering report is well-documented, the cost segregation technique is no more aggressive than using a permissible depreciation method under the Internal Revenue Code. Experience has shown that in a well-prepared engineering-based report where tangible property and land improvement segments of real estate can be traced to applicable construction documents, and the property unit costs are clearly determined, you will normally have great success in an IRS examination sustaining claimed tax benefits.