Approaches to Cost Segregation
The Invoice Approach
- The invoice approach cost segregation study is based upon a detailed review of all available applications for payment, construction invoices and change orders allocating those costs into the appropriate recovery periods.
- This approach is feasible only when ample cost detail is available.
- The invoice approach is only feasible with new construction and not when a property has been purchased or when a look-back study is being performed on a property for which the original construction costs have been misplaced.
- At times, it is an advisable approach when a quick review of a general ledger, depreciation schedule or application for payment is all that has been budgeted. It may be used when there is a need to review many properties quickly.
- The invoice approach will not maximize the available depreciation benefits. The extent of the benefit will depend upon the level of available cost detail, the type of subject property and the construction cost experience of the individual consultant. The invoice approach may leave as little as five percent on the table or as much as fifty percent or more.
The Engineering Approach
- The engineering approach is based upon a detailed review of all construction drawings and specifications or, in the case of a purchased building, an in depth site visit from which all estimates are conducted. It typically requires a practitioner with a construction, engineering or architectural background.
- It requires very detailed quantity "takeoffs" or estimates that are based on costs derived from nationally recognized cost estimating manuals such as RS Means or Marshall & Swift.
- All takeoffs are reconciled to the appropriate capitalized cost as provided by the client.
- This approach is most frequently used in look-back studies where there is little, if any, cost detail.
The SourceCorp Approach
- Our approach, often called the "combined approach", begins with a detailed analysis of the actual construction costs from invoices, applications for payment, and change orders.
- Our method uses the engineering approach in areas where the invoice approach has left personal property on the table. Most of the engineering approach's benefit is in hard to understand areas such as plumbing, electrical and mechanical estimating.
- It maximizes the available depreciation benefits of a cost segregation study.
- Whenever possible, SourceCorp utilizes this approach since it maximizes the benefit to the taxpayer.