The end product of the cost segregation study is the
cost segregation report. The Baden Tax Management report is a concise, well organized report that details each step of the cost segregation process allowing for full and complete documentation of the cost segregation study.
A cost segregation report reflects a study’s methodology and conclusions. The amount of detail included in a report varies considerably since there is no standard or prescribed format. The following elements are found in a quality report.
1. Summary Letter/Executive Summary
A quality report contains a summary to identify: the preparer, the date of the study, the taxpayer (or client), the subject property, and the property components classified as land, land improvements, building, or personal property.
2. Narrative Report
A quality report discusses the theory, definitions and the rationale behind the study in the narrative section. This section generally includes a more detailed description of the property/facility (i.e., a physical description and an explanation of the use for which it is intended, as well as a legal description of the property and its location). In addition, the narrative section highlights the regulations, rulings and court cases that support classifying assets as § 1245 property. The narrative also discusses the types and sources of data used (e.g., cost records, contracts, purchase agreements, published estimates) as well as how they were used. A list of potential data sources is included in Appendix Chapter 6.6.
3. Schedule Of Assets
A quality report has a schedule of assets that are the focus of the study. Generally, this schedule ties directly to the taxpayer's depreciation records. When a taxpayer reallocates costs of assets already "on the books," a quality report clearly identifies the specific assets impacted (and includes depreciation records from both before and after the reallocation).
4. Schedule Of Direct and Indirect Costs
A quality report lists all direct and indirect costs associated with a project. Indirect costs allocated to § 1245 property are clearly identified and explained. Separately-acquired assets are listed and discussed in the report to avoid duplication errors. Costs subject to IRC § 263A are also addressed.
5. Schedule Of Property Units And Costs
A quality report provides a schedule of property units and costs (with property descriptions) that are segregated into land, § 1245 property, and § 1250 property. This schedule is the final product of the study and serves as the basis for computing depreciation.
6. Engineering Procedures
A quality report describes the engineering procedures and methodology for determining the cost of each property unit. It also identifies the specific taxpayer records that were reviewed and discusses whether actual cost records or estimating techniques were utilized to break costs into smaller components. A record of inspections and/or interviews is included as well. The use of a common nomenclature or a standard numbering system is also referenced and/or explained.
7. Statement Of Assumptions And Limiting Conditions
A quality report describes the general understanding and conditions applicable to the report. This information may also provide an indication of the overall quality of the study.
8. Certification
A quality report certifies that the person who signed the report actually developed the analysis, opinions, and conclusions of the report. This section may also include the resume' or state the credentials and/or level of experience of the preparer.
9. Exhibits
A quality report generally includes various exhibits, such as the "Client Cost Sources" and the "Cost Source Reconciliation." These exhibits show the "book" (accounting) records on which the preparer relied in deriving total costs, and may include a reconciliation of the study to the fixed asset ledger. Photographs and/or videos may also be included as exhibits to assist in understanding the assets in the study.