🇺🇸 Made in America·100% U.S.-Based Team · 24+ Years in Cost Segregation
A property owner sat across from his CPA in a small office in Greensboro, North Carolina, last spring. He had bought a $2.4 million medical office building the year before. A cost segregation firm had pitched him a study that would produce roughly $720,000 of Year 1 federal deductions.
He had one question. He asked it twice, in two different ways.
"What does the IRS actually think about this?"
His CPA paused. He said something most CPAs say when they do not know the answer to a tax question they should know. He said, "It can be aggressive. The IRS does not love it."
The CPA was wrong. He had no idea how wrong he was.
The IRS does not just allow cost segregation. The IRS publishes a 347-page document called Publication 5653 that exists for one purpose. It tells IRS examiners how to evaluate cost segregation studies. The current edition is dated February 6, 2025. The first edition came out in 2004. It has been revised multiple times in 22 years.
Read that sentence again. The IRS publishes a guide on how to do cost segregation. They update it. They keep it on their website. They give it to their own examiners.
If the IRS hated cost segregation, the IRS would ban it. If the IRS thought it was a loophole, the IRS would close it. The IRS does neither. The IRS publishes the rules and tells everyone how to play.
The property owner in Greensboro listened to his CPA and walked away from the study. He paid roughly $266,000 in additional federal tax that year. Tax he did not owe. Tax the IRS itself would have told him he did not owe, if he had asked the IRS instead of asking his CPA.
This article is the answer to his question. What does the IRS think about cost segregation? Here is what the official record actually says.
The IRS issued an Action on Decision in 1999. It is called AOD-1999-008. An Action on Decision is the IRS's official statement on whether it agrees or disagrees with a Tax Court ruling. The 1999 AOD acquiesced to the Tax Court's decision in Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997).
In plain English, the IRS said: we agree. The methodology HCA used is the correct methodology. The same tests used to qualify property for the old Investment Tax Credit also apply to depreciation classification under MACRS.
That was the moment the IRS officially blessed cost segregation as a legitimate strategy. Not for hospital chains. Not for big corporations. For everyone.
Five years later, the IRS went a step further. In 2004 it published the first version of the Cost Segregation Audit Technique Guide. The Guide was written for IRS examiners. Its purpose, in the IRS's own words: "to provide examiners with an understanding of why cost segregation studies are performed for federal income tax purposes, how cost segregation studies are prepared, and what to look for in the review and examination of these studies."
Stop. Read that purpose statement one more time.
The IRS is teaching its own examiners how cost segregation studies are prepared. The IRS is telling its examiners what to look for. The IRS is providing 347 pages of technical guidance. The IRS is not banning the practice. The IRS is standardizing it.
The Guide has been updated multiple times since 2004. There were significant revisions in 2017 covering electrical distribution systems. The June 2022 update reflected changes from the Tax Cuts and Jobs Act of 2017 and the CARES Act. The current edition, Publication 5653 catalog number 20884M, is dated February 6, 2025.
In 22 years of updates, the IRS has never moved against cost segregation. The IRS has refined the methodology. The IRS has tightened the standards. The IRS has expanded the industry-specific guidance. The IRS has not once suggested cost segregation should not be done.
That is the official answer to what the IRS thinks. The IRS thinks cost segregation is a legitimate, well-established, standardized application of MACRS class lives that Congress wrote into law in 1986.
If the IRS publishes 300 pages on how to evaluate cost segregation studies, what is inside those 300 pages?
The answer is the second thing every property owner should understand. The Guide is not a list of restrictions. It is a manual on doing the work properly.
The Guide identifies six methodologies a cost segregation study can use. They are called Approaches 1 through 6.
The Guide explicitly names Approaches 1 and 2 as preferred. The IRS prefers them because they produce component-by-component documentation an examiner can verify. The other four produce category estimates with weaker documentation.
This is the IRS handing every property owner an answer key. Approaches 1 and 2 are the IRS-preferred methodologies. Use them and your study comes into audit prepared. Use the others and your study comes in vulnerable.
The Guide also contains dedicated industry chapters. Restaurants. Retail. Casinos. Auto dealerships. Auto manufacturing. Pharmaceutical and biotechnology. Residential rental. Each chapter walks through the typical components in that asset class and how each should be analyzed. The IRS is showing its work.
Consider what that means. The IRS is telling you, in writing, with industry-specific examples, exactly how to do a cost segregation study that will pass an IRS audit.
That is not the behavior of an agency that hates cost segregation. That is the behavior of an agency that wants the work done properly so its examiners do not have to fight bad studies.
Property owners often assume the IRS challenges cost segregation studies because the IRS does not like cost segregation. That is wrong on the facts. The IRS challenges studies for specific, documented reasons. The Guide names them.
The five common challenges, in the IRS's own words and order of frequency:
Inadequate documentation. This is the biggest one. A study that cannot show the work behind its classifications loses on audit. The IRS does not need the classification to be wrong. It needs the supporting analysis to be missing. Approaches 5 and 6 routinely produce this exact problem.
Improper classification of building systems. Components that are part of the basic building infrastructure cannot be reclassified as personal property unless they serve specific equipment. Studies that try to push general HVAC or general electrical into 5-year property lose this argument.
Aggressive treatment of land improvements. 15-year property includes specific items: parking lots, sidewalks, fencing, landscaping, exterior lighting. Studies that try to push items into 15-year that do not belong there get caught.
Failure to apply the Whiteco factors. The 1975 Whiteco Industries case established the 6-factor test for distinguishing personal property from real property. Every cost segregation study should walk every reclassified item through the six factors. Studies that skip the analysis lose on audit even when their classifications happen to be correct.
Recapture issues on disposition. Cost segregation creates accelerated depreciation. When the property is later sold, the accelerated depreciation is recaptured as ordinary income rather than capital gain. The Guide flags this for examiners to watch. Owners and CPAs need to plan for it.
Read the pattern. Every one of these is a study quality issue. None of them is a "cost segregation is wrong" issue. The IRS is not hunting for studies to disallow. The IRS is hunting for weak documentation that cannot support what it claims.
Studies built on Approaches 1 and 2, with an engineering analysis, proper Whiteco analysis, and component-level documentation, avoid every challenge on the list. Not because of luck. Because the IRS already told everyone how to avoid them.
A property owner in Tampa got audited last year on a $4 million office building cost segregation study. His original CPA had panicked. The Cost Seg America team handled the audit. The examiner asked specific questions. The team provided specific documentation, citing Whiteco, citing HCA, citing Publication 5653. The audit closed in eight weeks with zero adjustment. Zero dollars returned. The Cost Seg America team has done that 125 times. Same outcome every time.
That is what the IRS does when the study is built right. It examines. It verifies. It closes the file.
Property owners come to cost segregation conversations with a set of fears. Each one is reasonable. Each one has an answer already in the public record.
"Will I get audited if I do cost segregation?" The IRS does not flag cost segregation studies for automatic audit. The IRS uses a risk analysis framework described in Publication 5653 Chapter 5 to decide whether to examine a return. A properly built study on a typical property does not trigger the IRS's automated audit selection.
"Is cost segregation aggressive tax planning?" It is the opposite. Aggressive tax planning works the edges of the law. Cost segregation applies the rules the IRS itself wrote, in the way the IRS itself prefers. The IRS has been telling property owners how to do this work for 22 years. Following the IRS's own guidance is not aggressive. It is compliant.
"My CPA says he is not sure." Send your CPA the link to Publication 5653 on the IRS website. Ask him to read Chapter 4 on quality study elements, and Chapter 2 on the legal framework including the HCA case and the IRS acquiescence in AOD-1999-008. If your CPA still has doubts after reading the IRS's own published guidance, the issue is not the law.
"What if the IRS changes its mind?" Cost segregation has survived TCJA 2017, the 2022 ATG update, the 2025 OBBBA, and 22 years of IRS guidance revisions. None of the changes have moved against the basic methodology. If anything, the legal foundation has gotten more settled with each passing year.
"What if I get audited five years from now?" That is what audit defense is for. The Cost Seg America team includes unlimited audit defense with every study. Written responses and phone representation. No time limit. No hour cap. No additional fee. Ever.
Take a $2 million commercial property purchased in 2024. The default 39-year straight-line depreciation produces roughly $51,000 per year in deductions. Tax savings at a 37 percent marginal bracket: about $19,000 a year, give or take.
Now run the same property with cost segregation done right. A 30 percent reclassification rate moves $600,000 into 5-year, 7-year, and 15-year MACRS classes. Under 100 percent bonus depreciation restored by the OBBBA, all $600,000 deducts in Year 1. Tax savings at the same 37 percent bracket: roughly $222,000 in the first year alone.
The difference is $128,000 of additional cash kept in the first year. Cash you would have paid the IRS otherwise. Cash the IRS itself, in Publication 5653, has been telling you for 22 years that you do not owe.
The Greensboro property owner did not do the study. He paid roughly $266,000 in additional federal tax that year. That number is not a typo. It is not aggressive math. It is the difference between the deduction Publication 5653 authorizes and the deduction his CPA actually claimed. One conversation. Two-thirds of the cost of his building's cost segregation study. Gone.
Back to the property owner in Greensboro. His CPA told him cost segregation was aggressive and the IRS did not love it. His CPA was wrong. Not partially wrong. Completely wrong.
The IRS has officially acquiesced to the methodology since 1999. The IRS has published 347 pages of technical guidance since 2004. The IRS uses the Whiteco factors. The IRS recognizes the HCA case. The IRS prefers Approaches 1 and 2.
If you own commercial real estate and you have not done a cost segregation study, you are voluntarily paying more federal income tax than the law requires. The IRS itself has been telling property owners this for 22 years. It is not aggressive. It is not a loophole. It is not new. It is not something the IRS will close.
The Cost Seg America team has been performing engineered cost segregation studies for more than 24 years. 16,000 studies. 125 IRS audits defended. Zero losses. $0 ever returned to the IRS. Every study uses IRS Approaches 1 and 2. Every study is engineered, not estimated. The average first-year savings across the 16,000+ completed studies is $438,511. Made in America, by Americans.
Email: info@costsegamerica.com
Phone: 1-888-365-5023
Online: costsegamerica.com/free-proposal
The IRS told you what it thinks. The next move is yours.
