The IRS published a 347-page Cost Segregation Audit Technique Guide. It describes exactly how examiners evaluate studies — and lists six distinct methodologies in order of rigor. Here is what every property owner and CPA should know before hiring a firm.
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Every cost segregation study produces a depreciation schedule. But the amount of depreciation on that schedule — and its defensibility under IRS scrutiny — depends entirely on which methodology the firm used to produce it.
A firm using IRS Approach 5 software will typically find 15 to 30 percent of depreciable basis in short-life components. A firm using Approaches 1 and 2 on the same property will typically find 20 to 45 percent. On a $2 million building at a 35 percent tax rate, that difference is worth $35,000 to $105,000 in additional Year 1 tax savings.
That money exists. The only question is whether your study found it.
The IRS Audit Technique Guide describes six methodologies. Three account for nearly every study produced in the market. Here is how they compare — component by component.
| Approaches 1 & 2Cost Seg America — Every Study | Approach 4Mid-Tier Studies | Approach 5Cheap Studies Under $2,900 | |
|---|---|---|---|
| Component analysis | Every component individually identified, measured, and valued through direct engineering analysis of your specific property | Some direct engineering combined with software estimates to fill the gaps — partial analysis, partial estimation | Software model applies statistical averages to your building's total cost — your property is never directly analyzed |
| Who examines the building | Our analysts — component-by-component engineering-level work performed on your actual property | Analysts perform a partial examination — software fills in what the examination did not cover | Minimal examination at best — the software produces the result, not an analyst reviewing your building |
| Deductions found (typical) | 20% – 45% of depreciable basis | 17% – 35% of depreciable basis | 15% – 30% of depreciable basis |
| IRS characterization | “The most methodical and accurate of the cost segregation methodologies.” — IRS Audit Technique Guide | Mostly accurate — partial documentation may be questioned on specific components during examination | Results are “subject to challenge over statistical validity.” — IRS Audit Technique Guide |
| Audit defensibility | 125+ IRS audits over 24 years. Zero losses. $0 ever returned on behalf of any client. | Holds up to most audits — documentation gaps can create exposure when an examiner requests component-level backup | Statistically challengeable — if the IRS pulls a component value, there is no direct engineering record behind it |
| Where the work is done | 100% U.S.-based team — every analyst, every study, without exception | Varies by firm and engagement | Varies widely by firm — ask directly before you engage |
| Who uses it | Cost Seg America — on every single study we produce | Cost segregation firms that perform partial engineering work | Low-cost firms charging under $2,900 — fast to produce, less thorough by design |
These questions separate firms that actually do the work from cost segregation provider that sell the appearance of it. A provider doing real engineering work will answer every one of these without hesitation. One that cannot — or will not — has just told you everything you need to know.
The actual IRS approach number. If they cannot tell you, that is your answer. Our answer: Approaches 1 and 2, on every study, without exception.