Cost Segregation Study Fees

As everyday in social media and via the internet there are many ways in researching companies that perform cost segregation studies. Most clients will either ask their CPA about it or solicit them to find someone to assist them by getting a few competitive bids for them. What happens is the CPA firm will either call someone they know or heard about thru their association and do a google search on cost seg companies. What we find is most firms ask the few questions, what is your fee and what about if my client gets audited. Good questions to start but many forget professional services like cost segregation is not a service you can always look for the lowest price with greatest IRS audit support. There are alot of specialty firms doing cost seg that may have just the construction engineering expertise or the CPA expertise but not both on their payroll doing the studies. We have also learned from our research no two cost segregation studies are alike. Some firms are looking at just finding the low hanging fruit as we call it in the industry and basically do a desk type approach with many times not even visiting the facility. What happens in this case as a comprehensive study is not completed and many times it lacks the proper methodologies the IRS would like to see in any cost segregation study. Yes the IRS audit technique guidelines on cost segregation list several methodologies but they do not say they are all valid or bullet proof. For example the IRS has published guidelines which list several methodologies in which cost segregation studies are performed. The fourth one listed in the guidelines speak to a residual estimation approach whereby an abbreviated method in which only the short lived assets are determined. The short lived assets are then added together and then subtracted from the total project cost to determine the "residual" or building (longer lived) assets. While this is simpler and takes less time and firms can charge less professional fees, it can be less accurate. Most often the tangible assets or short lived assets are based on single unit costs for high quality construction while the building is based on gross square footage. So in actuality the results become skewed and thus inflating the valuation of the shorter lived assets in most cases. While the IRS nor any association prescribes a specific methodology, there are certain approaches (e.g. studies based on actual costs or on proper estimation techniques) that produce more accurate and reliable allocations

What we have found in practice and research is that there are no two cost seg studies done the same and no two fees charged the same either. It is the old vantage you get what you pay for. But one important factor is the insurance policy that it was done correctly with the right team of professionals in place. What price tag can one put on the "sleep factor" of not wondering what did I just do on my last years taxes with this accelerated tax benefits. Take an example of a cost seg study of a Hotel with a cost basis of $10 million placed in service in 2005. We have seen ranges for a cost segregation study from $4,000 to $15,000 or higher. How can that be you ask? Well it goes into the fact that different methodologies are in play and some are much more comprehensive in nature than others. So when measuring the cost in a competitive bid in does not always pay to go with the low bid like we would naturally do as consumers in our normal every day lives. We have seen studies performed in the marketplace with a disparity between 5-10% of assets not being allocated to shorter depreciable lives. Using the same example of the $10 million Hotel project the study that was quoted for $4,000 using a residual type methodology or other shortcuts was able to generate first year tax deferred benefits of approximately $489,000. Now compare that to a full comprehensive engineering based study with say a fee quote of $12,500. This study produced 5% more assets to shorter depreciable lives and the outcome produced $664,000 in first year tax deferred benefits. An astounding $175,000 more benefits in the very first year. Would you pay say 3 times more fee to get $175,000 more benefit? You bet!! Plus the added benefit is you know you can sleep at night knowing you have a quality study completed that was comprehensive in nature.

The moral of this story, when your clients ask for competitive bids, don't race to the low cost provider as you can see that the consequences can be enormous. With cost seg being such a time value of money and cash flow acceleration, to miss out on $175,000 (example above) because the fee was the lowest is short sided in comparison to the end result.