If you’re considering a cost segregation study to reduce your tax liability, you may be wondering, “Will this trigger an audit?” While tax-saving strategies are always worth evaluating carefully, a properly conducted cost segregation study is not something that should automatically put you at odds with the IRS. In fact, cost segregation is an IRS-approved method for managing depreciation on real estate, and when done correctly, it can provide substantial tax benefits with minimal audit risk. Here’s what you need to know.
What is a Cost Segregation Study? (Quick Recap)
A cost segregation study is a specialized tax strategy that accelerates the depreciation of certain components of your property. By reclassifying specific assets, like lighting, flooring, and landscaping, for shorter depreciation schedules (5, 7, or 15 years), property owners can reduce taxable income and increase cash flow. The IRS allows this approach because it accurately reflects the actual wear and tear of property components, but it’s essential that the study is performed by qualified professionals and adheres to IRS guidelines.
Is Cost Segregation Legal?
Yes, cost segregation is a completely legal, IRS-sanctioned method of managing depreciation on real estate assets. The IRS has published guidelines that specifically outline how cost segregation studies should be conducted. When done correctly, a cost segregation study is fully compliant with IRS regulations, and it is widely accepted as a legitimate tax-saving strategy.
Cost segregation is used by property owners across industries, from residential rental investors to large commercial property owners. However, to ensure compliance, it’s crucial to work with an experienced provider who understands the IRS rules and reporting standards.
Why Some People Worry About Audits
Many property owners worry that a significant reduction in taxable income may raise red flags with the IRS. While it’s true that certain tax deductions can draw scrutiny, the key to minimizing audit risk is to ensure that your cost segregation study is performed accurately and with proper documentation. The IRS is primarily concerned with ensuring that deductions are substantiated, not with the fact that you’re reducing your taxable income.
A professionally prepared cost segregation study provides detailed documentation, which demonstrates compliance and justifies the accelerated depreciation deductions taken.
How to Minimize Audit Risk with Cost Segregation
- Work with Qualified Professionals The quality of your cost segregation study is paramount. A study conducted by a qualified team of professionals—including engineers and tax experts—will be based on IRS guidelines and industry best practices. At USTAGI, our team specializes in producing precise, IRS-compliant reports that help property owners maximize tax savings while maintaining strict adherence to IRS standards.
- Ensure Proper Documentation A thorough cost segregation study includes detailed documentation that supports each reclassified asset’s depreciation schedule. This documentation is critical for justifying deductions in the event of an audit. A reputable cost segregation provider will include a comprehensive report outlining each asset’s classification, depreciation schedule, and the methodology used.
- Follow IRS Guidelines Closely The IRS has clear guidelines on cost segregation, which include recommendations for asset classification and the types of documentation required. Working with a provider who follows these guidelines is essential to ensuring your study is audit-ready. USTAGI’s cost segregation studies are designed to align with IRS standards, providing you with peace of mind.
- Be Conservative with Deductions It’s important to take advantage of tax-saving opportunities without overreaching. A credible cost segregation study will identify eligible assets and apply accurate depreciation schedules, ensuring that you don’t take unnecessary risks with aggressive deductions.
Can Cost Segregation Trigger an Audit?
While there is no guarantee that any tax return won’t be audited, a well-documented and professionally conducted cost segregation study is unlikely to be the cause. The IRS doesn’t consider cost segregation studies inherently suspicious; it’s primarily concerned with deductions that lack substantiation or deviate from established guidelines.
In fact, many property owners who follow proper procedures and work with a reputable cost segregation provider enjoy significant tax savings without experiencing an audit. Should the IRS inquire about your deductions, a high-quality cost segregation report will provide all necessary documentation to support your case.
What to Do if the IRS Does Inquire About Your Cost Segregation Study
If the IRS reviews your return, having a robust and IRS-compliant report is invaluable. A reliable cost segregation provider, like USTAGI, stands by their clients with thorough documentation and support. Our team can provide audit support to answer any questions the IRS may have about your deductions, so you can focus on your business with confidence.
The Bottom Line: Cost Segregation is Low Risk When Done Right
A cost segregation study, when conducted professionally and within IRS guidelines, is a low-risk way to save on taxes. By reclassifying assets for accelerated depreciation, you’re simply taking advantage of tax benefits allowed by the IRS. Working with an experienced team, like USTAGI, ensures that your study is accurate, compliant, and ready for any IRS inquiry.
If you’re interested in a cost segregation study but have concerns about audit risk, contact USTAGI today to learn how we can help you achieve substantial tax savings with complete peace of mind.
