We specialize in just one thing, classifying construction or acquisition costs for tax depreciation purposes. These depreciable costs typically range from a 39-year depreciable property category, known as real property, down to a shorter depreciable life category, known as tangible personal property. The depreciable tax life categories are based on the assets classification in accordance with Internal Revenue Service (IRS) guidelines. The present guidelines are known as the Modified Accelerated Cost Recovery System (MACRS). Accelerating the depreciation deduction under the MACRS guidelines decreases your taxes, improves your cash flow, and increases profits.

Additional guidance supported by the IRS to assist the taxpayer in categorizing the depreciable lives of assets correctly is in the form of court cases and revenue rulings. These court cases and revenue rulings are highly subject to interpretation. Our experience has shown that the IRS itself is not consistent in their interpretations of the court cases, revenue rulings and the tax depreciation laws. Unfortunately tax laws are not as clear as we would like; but, what is clear is how the IRS expects the Cost Segregation Study to be performed. The IRS has made it known for years that performing Cost Segregation Studies using the "residual method" or taking percentages via the "invoice approach" are not methodologies that will stand up under audit. The IRS has said in a recent "Legal Memorandum 199921045" the Cost Segregation Study must be performed using the "Engineering Approach". The best engineering approach study provides the most accurate classification of all the assets into the correct asset categories. The end results of a properly performed engineering approach study include a fully supportable study both from a tax and construction standpoint; also, the proper classification of assets under MACRS which provides the correct depreciation recovery period and method of recovery.

Ask anyone familiar with business finance about the benefit of accelerating the depreciation deduction. That person will tell you about the time value of money. Owners of real estate, if given the opportunity, would choose to take the deduction today rather than waiting to receive it over 39 years. It is well known that a business depends on its cash flow today to generate tomorrow's profits; you cannot afford to wait 39 years for the depreciation deduction earned today! The results of a properly performed Cost Segregation Study show that for every $1,000,000 of real property reclassified from a 39 year to a 5 year category, approximately $220,000 is generated as a net present value tax benefit.

Our Cost Segregation Studies focus on the use of the engineering approach and the appropriate documentation. Our cost segregation specialists perform an extremely detailed analysis of the construction blueprints and cost information. This is followed up with an on site inspection to verify the information supplied and to confirm our findings. In the case of an acquired property, we conduct a detailed site inspection, then use IRS industry standard construction cost reference sources to reverse engineer the construction costs. These costs include indirect and soft costs such as general conditions, professional fees, permits, etc. For example: if your building has special equipment with costs known to belong in the shorter life category you would classify the asset and move on. Here is where questions arise, such as: (a) what parts of the building plumbing, HVAC or electrical systems costs also belong in the shorter life category? (b) Are these systems used directly and primarily for that special equipment? Our report will tell you the costs of all the support systems components. This would include every foot of supply and waste piping, fixtures, every pound of supply and exhaust ductwork for the HVAC system; every foot of conduit, wire and circuit breakers; plus the portion of the electric panel for that special equipment traced all the way back to the switchgear.

Babcock-Ernst Engineering professionals have extensive experience and knowledge of construction methods, engineering, and the Internal Revenue Code. The latter includes the applicable Tax Court Cases and Revenue Rulings. Our Cost Segregation Specialists have over 25 years of combined experience. They have been performing and defending Cost Segregation Studies since 1989. Over the past 10-years we have completed over 500 individual Cost Segregation Studies. Four of these years were with Arthur Andersen in Atlanta. Our work paper documentation is thorough and detailed, providing you with complete documentation, also know as an audit trail in the event of an IRS audit.

We are the best professionals to bridge the gap between your accountant and the construction or acquisition team. Your business can increase cash flow with a Cost Segregation Study.