Cost Segregation is a very specialized field. It is important that the person conducting the study is highly qualified. A Cost Segregation Study performed In-House, by employees of the company, is often times reviewed with more scrutiny by the IRS.
A Cost Segregation Study performed In-House, by employees of the company, is
often times reviewed with more scrutiny by the IRS. Here is the summary of the
Boddie-Noell Enterprises court case:
The Company owned and operated approximately 240 Hardees restaurants.
The two employees who conducted the original cost segregation study used an
estimate of a existing study conducted by Hardee’s Food Systems which indicated
24% of the assets qualified for ITC. They sent questionnaires regarding costs
to contractors but didn’t keep those records.
The IRS examined the methodology and threw out the results of the
study.
The company took it to court and hired an individual cost segregation
practitioner to conduct studies on 7 properties prior to trial.
The practitioner did not visit any of the sites.
Indirect costs were improperly allocated to the estimated take offs (i.e.
the allocation of excavation and other site work to electrical, HVAC, etc.)
Some costs were taken from estimating books others were randomly assigned or
adjusted from the estimating books.
After examining the methodology the court stated, “The methodology employed
by plaintiff…. was at best, unusual.” They also stated that the results of the 7
studies performed by the individual cost segregation practitioner appeared to be
“based on after-the-fact speculations”. The court also found a lack of
contemporaneous evidence supporting the corporations’ claims.
A couple of other important points from this
case:
The court found that the suspended ceilings did not qualify as a short life
component.
The external orange roof panels specific to Hardees design did not qualify
as a short life component.
HVAC did not qualify as a short life component.
Drive up window units did not qualify a short life component.
Cost Segregation studies should not be taken lightly. With the issuance of
the IRS Cost Segregation Audit Techniques Guide in 2004, it shows that the IRS
knows what separates a good study from poor one. A study conducted by an
independent firm is looked at more favorably than one conducted “in-house”.
However, it is not safe to assume that any independent cost segregation
provider will do.
Before deciding on a provider, we recommend that you ask to see a sample of
their study so you can compare the methodology used and the level of detail
provided.
