In recent weeks we have had many conversations about the importance of hiring qualified providers for cost segregation and other services. In recent years the amount of bad advice being provided in the marketplace has grown. Unfortunately, at the same time, CPA firms have relied on Cost Segregation providers to give tax advice on how to handle certain issues.
Due to the competitive nature of the cost segregation industry, many firms have tried to find “loopholes” instead of working to be a quality provider. This often leads to bad information in the marketplace. Back in 2009, the IRS had to issue a coordinated issue paper on parking structures (LMSB4-0709-029). For years certain providers had argued that open-air parking structures were 15-year property. Under this coordinated issue paper, which was backed up by Chief Counsel Memo 20125201F, the IRS concluded that parking garages were 39-year. Additionally, the IRS argued that the lack of evidence for 15-year treatment warranted a negligence penalty.
Then in 2017, we ran into providers ignoring the binding contract rules surrounding the transition to 100% bonus on September 27, 2017. Under the Tax Cuts and Jobs Act eligible property acquired and placed-in-service after September 27, 2017, is considered eligible for 100% bonus deprecation. However, it is clear in the law that an asset cannot be considered acquired after such date as to which a binding contract is entered into. This was critical not only for the 100% bonus depreciation but also for the eligibility of a used property for bonus depreciation.
Finally, in recent months we have seen discussion on the interplay of 1031 Exchanges and cost segregation. Under the new tax law, 1031 Exchanges are limited to “real property”. This has led to multiple articles claiming that real property for 1031 exchanges follows “state rules” and not the federal definitions. This is wrong. The IRS came out with Legal Memorandum 201238027 to address this years ago which stated: “relying solely on state property classifications can lead to absurd results and would make federal tax law dependent on state laws and state policies.” This does not mitigate the benefits of combining 1031 Exchanges and cost segregation. In fact with the new tax rules surrounding dispositions, Qualified Improvement Property, and 100% bonus depreciation combining 1031 and cost segregation is a great strategy. However taxpayers and CPA’s need to be educated on the proper way to handle.
What is common on many of these issues is that the provider providing bad advice rarely provides citations. Also, they are often trying to prove that they know something that no other providers have knowledge on. It is critical that CPA’s and taxpayers verify that the advice coming from their cost segregation providers is reputable and accurate.