by Justin Saba, Partner/Founder, Saba Tax Advisory
The IRS released its latest Cost Segregation Audit Technique Guide (ATG) update on June 1, 2022. The ATG has been developed to guide Internal Revenue Service Examiners by examining a cost segregation study. The primary purpose is to help an examiner understand:
Why cost segregation studies are performed for federal income tax purposes;
How cost segregation studies are prepared;
What to look for in the review and examination of these studies;
When specific issues identified in the cost segregation study need further examination.
Below are some areas the IRS updated in the Audit Technique Guide for Cost Segregation:
Section 179 Expensing
Section 179D Deduction
Qualified Improvement Property (QIP)
Tax law from the TCJ, CARES, PATH ACTS
Basis allocation for depreciable buildings
Added a new chapter -- Chapter 8: Issue Specific Guidance on Electrical Distribution Systems
How is the IRS Audit Technique Guide valuable for performing Cost Segregation Studies?
Although the IRS ATG was developed for IRS examiners, cost segregation specialists also use it as guidance when performing a cost segregation study. It is essential to note the ATG was initially created by a team of Service Engineers and Revenue Agents. It was updated by members of the DCE PN and is not intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.
The most significant update to the ATG is the new chapter on guidance for electrical distribution systems. The Internal Revenue Service goes into great depth regarding how and when an electrical component should be classified as either personal property or a structural component. When choosing a cost segregation provider, make sure they are well aware of all guidance updates from the IRS.
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What is a Cost Segregation Study?
For real estate investors, cost segregation studies are a valuable tool for reducing taxes and increasing profits. Cost segregation studies identify and reclassify personal property within a purchased home or other real estate property. By doing so, investors can maximize their tax deductions and minimize their overall tax liability.
The information provided in this blog is intended for general information only, and is not meant to constitute tax advice.