IRS Documentation Standards for Cost Segregation
The IRS Cost Segregation Audit Techniques Guide establishes documentation standards for defensible studies. Retail property owners claiming accelerated depreciation should understand these requirements and ensure their studies meet established standards from the outset.
Quality documentation includes detailed identification of each reclassified component, the methodology for determining costs or values, and references to applicable tax authority supporting the classification. Studies lacking this detail may not withstand IRS examination.
Engineering-based studies provide stronger documentation than estimates or rules of thumb. The IRS distinguishes between detailed engineering studies that examine actual property conditions and estimate-based approaches that may not accurately reflect specific property characteristics.
Photographic documentation showing property conditions at study time supports component identification. Interior and exterior photos of items claimed as personal property or land improvements provide visual evidence that strengthens audit defense.
Records to Maintain for Retail Properties
Construction cost records including contracts, invoices, payment applications, and change orders support accurate cost allocation. When actual costs are documented, they generally provide stronger support than estimated allocations based on cost guides.
Tenant improvement documentation should be maintained separately for each tenant space. Records of allowances provided, reimbursements made, and improvements constructed enable proper tracking of improvement basis and appropriate depreciation treatment.
Capital expenditure records for ongoing improvements should identify component types and installation dates. Proper records support depreciation claims on capital improvements and document placed-in-service dates for bonus depreciation purposes.
Site plans and building drawings help identify land improvements and building components. Civil engineering drawings showing parking lots, drainage systems, and site utilities support land improvement classifications and help establish component locations.
Maintaining Records Over Time
Records should be maintained at least until the statute of limitations expires on the final return affected by the depreciation. For cost segregation studies, this means keeping documentation for the full depreciation period plus the examination period after final deductions are claimed.
Electronic record keeping is acceptable and often preferable for long-term storage. Digital copies of invoices, contracts, and study reports should be organized for easy retrieval if examination occurs years after the study.
Changes in property ownership may affect record availability. When selling properties, consider retaining copies of cost segregation studies and supporting documentation in case questions arise regarding the depreciation claimed during your ownership period.
Tenant turnover creates ongoing documentation needs. When spaces are re-tenanted and improvements are demolished or modified, documenting the disposition of prior improvements supports abandonment losses and establishes basis in new improvements.
How Goodlane Group Helps with Documentation
Goodlane Group helps retail property owners gather and organize documentation before cost segregation studies begin. Complete documentation at study inception improves accuracy and reduces the time and cost of engineering analysis.
We connect you with cost segregation firms that produce comprehensive reports meeting IRS documentation standards. Study reports from our network firms include the detail and authority references needed for confident audit defense.
Our team helps establish documentation protocols for ongoing improvements and tenant turnovers. Capturing appropriate records as capital expenditures occur simplifies future cost segregation on those improvements.
If examination occurs, Goodlane Group helps coordinate response between your tax advisors and the cost segregation firm. Having organized documentation available and accessible engineering expertise significantly improves audit outcomes.