Tax Treatment Of Cost Segregation
Accounting Method Option

In regards to Cost Segregation, the IRS assumes adoption of a particular method of accounting if you treat an item in the same manner on two consecutively filed tax returns. If, on the initial return, you calculate depreciation using a certain method, that method is "adopted" when you file your return in year two, using the same method. In most cases, to change the method of accounting, you need the consent of the IRS, which is obtained by filing Form 3115.

Section 481(a) Adjustment

Section 481 (a) Adjustment is the amount of change in depreciation that is allowable from the amount of the depreciation taken prior to the year of the change of accounting method. When the Cost Segregation study is complete, the assets identified are depreciated using the methods and periods as corrected. The result is compared to the depreciation deductions claimed on all prior returns for the same assets. Revenue Procedure 99-49 required that the adjustment, whether positive or negative, be included in the income or deducted in arriving at taxable income equally over a period of four years, although revenue ruling 2002-19 changed that four-year rule to one year for adjustments that are in the tax payer's favor. This benefits the taxpayer, as it creates a negative adjustment to income, or a deduction. After completing a Cost Segregation study, the tax payer may take into account the entire amount of income in the year change by making an entry on the appropriate line of Form 3115.

Cost Segregation: Timely Filing

In regards to applying a Cost Segregation study, a change in accounting method application should generally be filed within the first 180 days of the year of change. This requirement is waived for application filed in accordance with Revenuer Procedure 99-49 - which must be filed in duplicate. The original must be filed with the return for the year of change by the due date and a copy must be sent to the national office of the IRS no earlier than the first day of the year of change, and no later than the date the original is filed with the return for the tear of change.

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