The History of Cost Segregation Analysis
The legal support for cost segregation analysis stems back to 1959, when the court ruled in favor of segregating costs into components for tax depreciation on buildings (Shainberg v. Commissioner). Three years later in 1962, Congress enacted the Investment Tax Credit (ITC) in order to stimulate the economy by encouraging modernization and expansion of facilities. The ITC related to tangible depreciable property that was placed in service. The ITC further lead to a trend of segregating property that made up a piece of real estate.
In 1975, the tax court developed six key questions used to determine if an asset qualifies as tangible personal property (Whiteco Industries, Inc. v. Commissioner). In 1981, the Investment Tax Credit is repealed, and in 1986 the new less favorable MACRS recovery periods are introduced. The life for commercial property is increased to 31 1/2 years. In 1993, it is further increased to 39 years.
In recent years, additional legislation had further defined the cost segregation process. In 1997, the court ruled in Hospital Corporation of America v. Commissioner that certain building support assets, which directly support tangible personal property, could be classified as assets with shorter class lives for tax purposes. This ruling provided legal support to use cost segregation analysis, specifically as it relates to the use of component depreciation.
In January of 2006 the IRS further revised the originally issued 2004 Audit Techniques for Cost Segregation Studies guide. This guide outlines the criteria that should be used by IRS auditors when reviewing a cost segregation analysis. The Field Directive on the Planning and Examination of Cost Segregation in the restaurant industry was also issued in 2004, defining cost segregation as it specifically relates to the restaurant industry. Besides providing proof that the IRS recognizes the application of case law to cost segregation studies as a legitimate tax tool, these guides issued by the IRS made the criteria that needed to be followed by firms such as Franklin Tax Group even more clear.
