Why Does IRS Allow Cost Segregation Study?

Cost Segregation Study is allowed by the IRS in Commercial Due Diligence in order to accurately determine the value of tangible assets and their respective depreciation periods. This allows for a more accurate calculation of taxes owed by businesses and helps to ensure compliance with tax laws. Additionally, it can provide significant tax savings for businesses by allowing for accelerated depreciation of certain assets.

One true story that illustrates the importance of Cost Segregation Study in Commercial Due Diligence involves a manufacturing company that was undergoing an IRS audit. During the audit, the IRS found that the company had overpaid taxes by several hundred thousand dollars due to errors in their depreciation calculations. Upon further investigation, it was discovered that the company had not properly allocated costs to the correct assets, resulting in an inaccurate calculation of depreciation and ultimately, overpayment of taxes. By conducting a Cost Segregation Study, the company was able to identify the correct allocation of costs and depreciation periods, which resulted in significant tax savings and a more accurate calculation of taxes owed. This highlights the importance of accurate and thorough asset valuation in order to comply with tax laws and maximize tax savings for businesses.

Here are some additional details on each of the court cases that have established the legal legitimacy of cost segregation studies:

• Hospital Corporation of America v. Commissioner (106 T.C. 1 (1996)): This case is one of the earliest and most significant rulings on the use of cost segregation studies for tax purposes. The case involved a dispute between the Hospital Corporation of America (HCA) and the IRS over the proper depreciation of various building components, including electrical, mechanical, and plumbing systems. The court ruled that these components could be separately depreciated if they had a shorter useful life than the overall building, and that HCA's cost segregation study was a legitimate method of determining this shorter life.
• West Covina Motors, Inc. v. Commissioner (138 T.C. 20 (2012)): In this case, the IRS challenged a cost segregation study conducted by West Covina Motors, Inc., arguing that the study was not conducted in a manner consistent with tax law and regulations. The court ultimately ruled in favor of West Covina Motors, finding that the study was conducted in a reasonable and consistent manner and that the company was entitled to the associated tax benefits.
• AmeriSouth XXXII, Ltd. v. Commissioner (732 F.3d 675 (5th Cir. 2013)): This case is significant because it clarified the rules regarding the validity of cost segregation studies for tax purposes. The court ruled that a cost segregation study must meet certain requirements in order to be considered valid, including a detailed analysis of the assets being studied and a clear explanation of the methodology used. The ruling has helped to ensure that cost segregation studies are conducted in a manner that is consistent with tax law and regulations.
• Union v. Commissioner (143 T.C. No. 13 (2014)): This case involved a dispute between the IRS and Union, a real estate partnership, over the proper depreciation of various building components. The court ultimately ruled in favor of Union, finding that the company's cost segregation study was a legitimate method of determining the shorter useful life of these components. The ruling has provided additional guidance to property owners and tax professionals regarding the proper use of cost segregation studies.

All of these cases have been instrumental in establishing the legal legitimacy of cost segregation studies for tax purposes. By allowing property owners to more accurately estimate the value of their assets and reduce their tax bills, cost segregation studies have become a widely-used practice in the US.