Background of IRS Developing its Position on Cost Segregation
Prior to the ruling on the seminal HCA Hospital vs IRS case, the Service opposed cost segregation. However, ever since that ruling in 1997, the IRS has stated in its Audit Techniques Guide that “determining a proper recovery period” is mandatory to calculate depreciation for Federal income taxes. The Audit Techniques Guide (ATG) is clear:
“to calculate depreciation for Federal income tax purposes, taxpayers must (emphasis added) use the correct method and proper recovery period for each asset…”
A straight forward reading of the ATG could result in the belief that taxpayers are derelict if they are not “using the correct method and proper recovery period for each asset”.
To the writer, this is much more than an endorsement of cost segregation, it is saying taxpayers are not meeting minimal standards unless they make a reasonable attempt to determine the proper recovery period for each asset.
Real estate contains short life and long life depreciation. Cost segregation is the only known process to make a reasonable and reliable attempt to determine proper recovery periods.