What is Cost Segregation?

 Cost Segregation is the IRS allowed engineering-based method of separating a buildings component’s into shorter depreciating class lives. The method came about in 1962 with the enactment of the Investment Tax Credit but was later repealed in 1986.Then in 1997, the Hospital Corporation of America sued the IRS and successfully defended the application of an engineering-based Cost Segregation study. Since then, Cost Segregation has slowly increased in popularity and is becoming an industry standard for depreciating commercial property.

In 2004, the IRS issued the Audit Techniques Guide, outlining the criteria of a quality Cost Segregation

Study and provided direction to IRS field agents when reviewing a report that does not employ the methods suggested in the Audit Techniques Guide. This year, in response to the Covid-19 pandemic, the IRS passed the CARES act, subsequently increasing the benefits of Cost Segregation by increasing a taxpayer’s ability to depreciate Qualified Improvement Property (QIP).

The CARES Act included a highly anticipated technical correction to QIP, the TCJA intended to classify improvements to the interior portion of nonresidential buildings as 15-year depreciable property eligible for 100% bonus depreciation. The CARES Act now allows taxpayers to apply the 100% bonus depreciation rules to QIP retroactive to January 1, 2018. As such, taxpayers will likely have the option to amend their 2018 and 2019 tax returns to claim the additional depreciation expense.