Revised Audit Technique Guide for Cost Segregation


The IRS updated its Cost Segregation Audit Technique Guide as of June 1, 2022. The updates were as a result of changes in law, including the Tax Cuts and Jobs Act of 2017 (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Topics updated included IRC Section 263A, accounting method changes, depreciation and bonus depreciation, deductions under IRC Sections 179 and 179D and qualified improvement property. Below is a summary of the recent updates.


  • Consider § 263A – Small business taxpayers are no longer required to capitalize costs including interest under § 263A. The IRS Cost Segregation Audit Technique Guide defines a small business taxpayer as “a taxpayer that (a) has average annual gross receipts of not more than $25 million for the 3 prior tax years (adjusted annually for inflation), and (b) is not a tax shelter as defined in § 448(d)(3).”


  • Change of Accounting Methods – Language was added noting the taxpayer must file a Form 3115 under a general voluntary method change under Rev. Proc. 2015-13 or automatic change under Rev. Proc. 2022-14 if adjustments to depreciation methods are required based on a cost segregation study performed after the original return. This section notes that the involuntary method change procedures (Rev. Proc 2002-18) should be used, if it is determined under review, that the taxpayer is using an accounting method that does not clearly reflect income or is improper under § 446(b); or the taxpayer changed its method of accounting without obtaining the consent of the Commissioner under §446(e).


  • Depreciation, Recovery Periods and Qualified Improvement Property – Recovery period tables were added to included Qualified Real Property, noting property placed in service after 12/31/17 should be considered QIP and given a GDS 15-year recovery period and ADS 20-year recovery period assuming required definitions are met. See table below.

(Note. From Internal Revenue Service. (6-2022). Publication 5653: Cost Segregation Audit Technique Guide, page 69. Retrieved from https://www.irs.gov/pub/irs-pdf/p5653.pdf )


  • Bonus Depreciation – Revised bonus depreciation language for eligible property, used property, QLIP, QRP, QRIP and QIP. Additionally, tables were added laying out the revised bonus deprecation rates after 9/27/2017. Qualified property placed in service after 9/28/17 and before 12/31/22 will receive 100% bonus depreciation. Beginning in 2023, all qualified property placed in service will receive 80% bonus depreciation. See table below for updated rates.

(Note. From Internal Revenue Service. (6-2022). Publication 5653: Cost Segregation Audit Technique Guide, page 131. Retrieved from https://www.irs.gov/pub/irs-pdf/p5653.pdf )


  • § 179 Deduction – The Taxpayer Certainty and Disaster Tax Relief Act of 2020 made the IRC § 179 deduction permanent. The Path Act of 2015, TCJA of 2017 and the CARES Act also made significant changes to IRC § 179, MACRS and bonus depreciation. See tables below for a summary of IRC § 179 Qualified Real Property.


(Note. From Internal Revenue Service. (6-2022). Publication 5653: Cost Segregation Audit Technique Guide, page 124-125. Retrieved from https://www.irs.gov/pub/irs-pdf/p5653.pdf )


  • § 179D Deduction – The § 179D Deduction allows Building Owners and Lessor to deduct Energy Efficient Commercial Building Property (EECBP) up to $1.80/SF of the building.



Reference:

Internal Revenue Service. (6-2022). Publication 5653: Cost Segregation Audit Technique Guide. Retrieved from https://www.irs.gov/pub/irs-pdf/p5653.pdf