Cost Segregation Study

Cost Segregation and § 179 benefit analysis: The first step in taking advantage of the extensive tax benefits that the IRS affords tax payers through cost segregation and the § 179D energy efficient building tax deduction is to have a no-cost benefit analysis performed by a knowledgeable engineering tax services company like Blue Ray Engineering. Their team will review your project details and swiftly turn around a net present value benefit assessment which provides the taxpayer with a calculated net return on their study investment. This initial analysis will lay out the difference the taxpayer can expect with and without having these studies performed. An example provided below shows the initial assessment output and is then followed by the actual cost segregation study results for a standard (non-energy efficient) hotel property. For more information regarding the Energy Policy Act (EPAct) of 2005 and how it works, see our § 179D energy efficient building tax deduction page.

Cost Segregation Study Initial Net Present Value Assessment

Cost Segregation Study Report Results Summary

Client: This study was prepared for a realistic sample hotelproperty located in Florida. The property is owned by a private investment group.Purchased property improvements consist of an approximately 75,000 square foot, five (5) story hotel building. The improvements were originally constructed and placed in service in 1994. The approximately 4.5 acre property containing the building, amenities, driveways and parking areas was purchased in May 2013 and immediately place into service.

Study Purpose: The purpose of this study was to perform an engineering analysis to segregate the costs of construction and other related costs of the various components of property according to their function in order to identify and classify those assets that could be depreciated using accelerated periods as compared to real property as defined by Section 1250 of the Internal Revenue Code (IRC). The segregated property includes IRC section 1245 property that can be depreciated using the modified accelerated cost recovery system (MACRS).

Scope of Investigation: The scope of the investigation included performing a detailed analysis of all available drawings, specifications, contractors’ pay requests, and/or client details for the property in order to identify component level assets and property that, although placed into service with the initial construction or modification of the prime real property asset, is not Section 1250 property and can be depreciated using accelerated methods. The scope of the investigation also included performing a comprehensive site visit to complement the data review and assist in appropriately classifying applicable property. Our team performed the site visit in early2014, in support of the client’s 2013 tax return.

Site Description: The improvements, located in Florida,are typical of moderately priced hotel style construction containing an approximately 75,000 square feet building containinglobbies, pool areas, laundry facilities, breakfast areas, elevators and guestrooms.

Study Procedures: This study follows commonly accepted cost segregation procedures allowed by the Internal Revenue Service (IRS) for the Modified Accelerated Cost Recovery System (MACRS) method. Project costs were first identified as direct or indirect. Indirect costs were proportionally applied to all components of the project. Components were then segregated into 5 year, 7 year, 15 year, and 39 year (Section 1250 property) categories according to their use and life expectancy as determined by the IRC. All available IRS and court rulings, including IRS ruling SPR-122705-98 dated April 1, 1999 and the December 2007Cost SegregationAudit Techniques Guide, were properly considered in this investigation.

Conclusions and Recommendations: The following chart presents our assessment of applicable property categories based on our review of all project details.

2013 Purchased Property Segregation Summary

5 year property $1,162,017.28
7 year property $1,162,017.28
15 year property $1,162,017.28
39 year property $1,162,017.28
Land Value
(Including closing cost)
Total $1,162,017.28

Total Property Segregated (Excluding Land): $5,417,989.61

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