Cost Segregation

Cost segregation is the comprehensive analysis of total project cost (or price) by documenting the cost (or value) of individual assets within appropriate tax life categories.  The depreciation allowance for tax purposes considers the documented cost (or value) of an individual asset and its tax life.

Whether your real estate and related assets project consists of buying, selling, inheriting, partially demolishing, renovating, installing, building or expanding, American Appraisal's cost segregation services can assist you in generating cash flow benefits through the tax savings allowed by accelerating asset depreciation for tax accounting purposes.

Successful achievement of cost segregation objectives depends on selection of a firm that has been in the cost segregation business since the very beginning, has a solid record of sustaining its conclusions with the Internal Revenue Service and will be there for you. 

American Appraisal has the experience and expertise to deliver these services in a timely and cost-effective manner.

Are the assets that make up your project being properly classified?

In many cases, certain assets or soft costs have been improperly classified into long-life (real property) tax classes.  Cost segregation services can appropriately classify these assets and their associated hard and soft costs or values into shorter tax life classes, thus creating tax savings.

American Appraisal’s cost segregation services may provide a substantial return on investment. We can perform a preliminary benefit analysis to provide an estimate of your potential tax savings.

Cost segregation studies are appropriate for projects that include assets:

• inextricably linked to specific equipment
• integral to the manufacturing process, that is, their installation provides mechanical, electrical or environmental utility that is necessary to manufacture
• not reasonably adaptable to a general use
• not serving more than an incidental relationship to the operation or maintenance of the building
• accessorial to the business and not the building
• loosely affixed to the land or building and readily removable
• that if removed would not substantially damage the building
• that can be, have been, are designed to, or are expected to be moved

American Appraisal’s cost segregation services can be engaged regardless of project status, including:

• During the construction planning stage, when we identify short-life assets and structure a cost collection system to be compiled by the construction manager
• Post-construction, when we undertake a thorough review of general contractor costs, architectural and engineering fees, indirect owner-incurred costs, engineering drawings and specifications, and the like.
• During acquisition due diligence, when we review the assets involved and provide values by asset category for buy/sell transaction agreements
• Post-acquisition, when we review and categorize the assets acquired and provide the contributory value of each in the context of the overall purchase price.  The valuation of each identified asset considers factors such as physical deterioration, functional and external obsolescence, and entrepreneurial profit, all of which can impact the value of existing assets.
• During major retrofitting projects, when we assist in supporting whether the cost expended reflects an asset to be capitalized or a repair to be expensed.  This analysis considers the impact of a project on the appropriate component of a property, as well as the project’s impact on the life of that component.  Current regulations require analysis if you intend to expense repair projects.
• Retrospective studies may be particularly beneficial to a company emerging from a net operating loss position or having many assets improperly classified as real property.  In these situations, the depreciation adjustment can be fully recognized in the first year, significantly increasing cash flow.
• Our modeling service is considered when a basic facility design (model) is used repeatedly in various geographic locations (e.g., hotels, restaurants and drugstore chains).  We complete our detailed analysis of the base model and, with every location actually developed, consider its design nuances (such as yard improvements, which vary to accommodate use of the site selected) and actual costs incurred. Once the base model is analyzed, each subsequent project analysis allows for substantially less consulting effort, which reduces fee while maintaining the quality of the work. 

Relevant Rulings and Cases

The Peco Foods, Inc. & Subsidiaries v. Commissioner of Internal Revenue ruling disallowed a refined allocation of value to assets of various tax lives because the buy/sell agreement allocated a specific dollar amount to real property.  Avoid specific asset values within buy/sell agreements if those values have not been carefully considered and developed.

In the AmeriSouth case (AmeriSouth XXXII, Ltd. T.C. memo. 2012-67), the Tax Court held all but a small amount of items identified had to be depreciated over the life of the building.  In this case, the IRS also argued that some of the assets being depreciated were not even owned.  At the time the case was tried and subsequently decided, no one was available to support the cost segregation service provided.  Avoid aggressive cost segregation practitioners that may not be around to support their cost segregation studies.

Return on Invested Fees

Avoid cost segregation consultants who operate on a contingency-fee basis.  In the acquisition of existing assets, many state certification laws prohibit it.  In the analysis of new construction costs, a contingency fee may lead consultants to be insupportably aggressive in their categorization of the assets.  In addition, contingency fees will likely exceed the hourly rate billings for the required work effort - why give away some of the cash flow benefits obtained?

Avoid cost segregation consultants who are not certified by the state in which the project is located and/or lack an engineering degree or background. Either of these can result in opportunities being missed or a lack of credibility and sustainability.

Additional Regulations

Increasingly, states are mandating that consultants within their jurisdiction be certified before they opine on the value of real property.  In addition, studies that involve preexisting/used assets require valuation skills. Unlike the analysis of the cost new associated with specific construction projects, cost segregation for preexisting/used assets must consider depreciation at the asset level, which can consist of physical deterioration as well as functional and economic obsolescence.  Is your cost segregation consultant certified to perform valuations and opine on the value of real property in the state where your project is located?

American Appraisal’s cost segregation consultants are certified as required by individual states.  This is vital when segregating a project’s underlying land value and when gauging the contributory value of the various assets identified.

Why American Appraisal?

• No other firm has been in the cost segregation business longer than American Appraisal. 
• We understand cost and valuation. We collaborate with tax advisors to maintain awareness of cutting-edge developments within tax laws, revenue rulings and tax court cases.
• We have a history of positive interaction with the Internal Revenue Service.
• We have successfully completed thousands of cost segregation studies. Our experience eliminates potential surprises for us, the Internal Revenue Service and, most importantly, our clients.
• American Appraisal's consultants have engineering-related degrees or backgrounds, allowing proper and efficient interpretation of project drawings, specifications and cost or purchase documents. 
• American Appraisal's consultants have the state certifications required to legally value acquired real property assets. Our state-certified appraisers help ensure that real property assets are not overvalued or undervalued. 
• Our consultants focus on specific industries and property types.  Understanding the function and special nature of the components that make up any given project allows us to maximize and support our conclusions.  This eliminates our learning curve, freeing our clients’ personnel to concentrate on their day-to-day responsibilities.
• We can appropriately identify and analyze acquired assets, as well as consider the impact of existing lease agreement terms and conditions.

Our team members have analyzed the entire life cycle of projects, from development to demolition.  As a provider of multiple valuation services, we can leverage our cost segregation services to provide additional services over time including valuation and cost analyses for insurance, property tax and financing purposes.  We analyze all asset categories including land, land improvements, buildings, personal property and intangible assets.