5 Things a Tax Professional Should Expect From a Cost Segregation Firm

TL;DR: A cost segregation firm should make your job easier, not hand you a project in the middle of filing season. Five things separate a firm worth sending clients to: a report built from an in-person site visit that holds up in an exam, a drafted Form 3115 on look-back studies when your client asks for one, a turnaround you can plan around, real support if the IRS asks questions, and the candor to tell your client when a study won't pay for itself. If a firm can't do all five, your client is buying a number, and you're the one who has to defend it.

Key Takeaways

• The IRS Cost Segregation Audit Techniques Guide, Publication 5653, says a field inspection is recommended for all quality studies, new or used property. A trained professional should walk the building in person.
• On a look-back study, a firm can draft the Form 3115 alongside the report at your client's option. You review it, apply your judgment and sign.
• A fully engineering-based study takes time: generally 2 to 4 weeks once the information and site visit pictures are in, and up to 4 to 6 weeks during tax season.
• Ask before the engagement whether audit support is included or billed separately.
• A good firm will tell your client when a study won't pay for itself, before the client spends anything.

A look-back study can sit unfiled for one simple reason: the paperwork shows up in March, on top of everything else on your desk. Your client wanted the deduction. You had no room to build the filing.

A good provider should carry most of that weight. Here's what a cost segregation firm should be doing for you, and what to ask before you send a client anywhere.

1. A report built from an in-person site visit that holds up in an exam

The firm should hand you an engineering-based report built from a site visit by a trained professional.

The IRS says as much. Publication 5653 (6-2022), the Cost Segregation Audit Techniques Guide, states: "A field inspection is recommended for all quality studies, whether the studies are for new or used properties." That means a trained professional standing in the building, photographing the carpet, the dedicated electrical, the parking lot and the site lighting. A questionnaire and a few photos uploaded by the owner are not the same thing.

The same guide lists 13 principal elements of a quality study, from the preparer's credentials to reconciling allocated costs to actual costs. It also says quality studies "greatly expedite the Service's review, thereby minimizing the audit burden on all parties." Ask the firm to show you where each element lives in a sample report.

Then look at the asset detail. You want each asset listed with its cost, recovery period, method and convention, in a form that drops into your fixed asset software without retyping. If you have to rebuild the schedule yourself, the firm passed its work to you.

2. A drafted Form 3115 on look-back studies, when your client asks for it

On a building your client has owned for years, the firm should be able to prepare a draft Form 3115 alongside the engineering report.

That's the step that stalls look-back studies. The study is done, the catch-up depreciation is real, and the form lands in the busiest weeks of your year. A firm that can draft it, with the change number, the method descriptions and the Section 481(a) computation already carried through, takes most of that load off your plate.

Two details matter. The draft is at the client's option, so it has to be requested; it isn't automatic. And it stays a draft. You review it, apply your own judgment and sign. Many providers won't prepare it at all, so ask the question before your client signs an engagement letter.

We walked through the look-back from the owner's side on the podcast, in the episode on claiming missed depreciation with Form 3115, if you want something to send a client who is asking about it.

3. A turnaround you can plan your deadlines around

The firm should give you a realistic delivery window up front, and a real study is not an overnight job.

Through CSSI, a study generally takes 2 to 4 weeks once the required information and the site visit pictures are in. During tax season that can stretch to 4 to 6 weeks. A firm promising a full engineering-based report in a few days is telling you something about how much engineering is in it.

Put that next to your calendar. Calendar-year partnership and S corporation returns are due March 15 under Internal Revenue Code section 6072(b), and individual returns are due April 15 under section 6072(a). A study ordered in mid-February can land on the wrong side of March 15. A study raised in the fourth quarter lands before your busy season starts.

The firm's job is to tell you the timeline before work begins and to hit it. Your job gets easier when the conversation with the client happens in October or November instead of March.

4. Support that shows up if the IRS asks questions

The firm should stand behind its study if an examiner asks about it, and you should know before the engagement whether that support is included or billed separately.

Audit support that is neither included nor priced is support you can't count on. Ask who answers the examiner's questions, what documentation the firm keeps, and how long it keeps it.

Track record counts here too. CSSI has completed more than 65,000 studies, and none of them has caused an audit. That's what a defensible method looks like over time. Nobody can promise the IRS will never look. A good file answers the questions when it does.

For what your client should keep on hand, the post on building a cost segregation compliance folder lays out the records.

5. The candor to say when a study won't pay for itself

A firm worth your referral will tell your client no when the numbers don't work.

You already know the usual reasons. The depreciable basis is too small; my own rule of thumb is about $150,000 of property cost basis. The client plans to sell soon, and at sale the depreciation taken on reclassified personal property comes back as ordinary income under section 1245, to the extent of the gain. Or the client has no way to use the loss right now: for individuals, section 469(a) disallows a passive activity loss for the year, and section 469(b) carries it to the next year. A suspended loss still has value, but it changes the math.

A firm that skips that conversation and leads with a projected deduction is selling the number. The no-cost analysis exists to answer the question before anyone spends money, and the post on how to know whether a study will pay for itself covers the client side of that decision.

When a firm tells your client no, it protects your credibility as much as theirs.

Frequently Asked Questions

Is the drafted Form 3115 included automatically?

No. On a look-back study, a draft Form 3115 can be prepared alongside the engineering report at the client's option, so it has to be requested. The tax professional reviews it, applies their own judgment and signs.

How long does a cost segregation study take during tax season?

Through CSSI, a study generally takes 2 to 4 weeks once the required information and the site visit pictures are in, and up to 4 to 6 weeks during tax season. A fully engineering-based study takes time, so raising it in the fourth quarter keeps it clear of the March and April deadlines.

Does a cost segregation study increase the client's audit risk?

A quality study is built to answer an examiner's questions. IRS Publication 5653 says quality studies greatly expedite the Service's review and minimize the audit burden on all parties. CSSI has completed more than 65,000 studies, and none of them has caused an audit.

Does my client need to gather documents before the first call?

No. The first conversation is short and no specific numbers are needed. If the property looks like a candidate, a questionnaire follows to collect what the analysis needs.

What happens if a study won't pay for itself?

Your client hears that before spending anything. Common reasons are a small depreciable basis, a planned sale soon, losses the client can't use under the passive activity rules, or a property that has already been studied.

Choosing a cost segregation firm for your clients

You're the one who signs the return, so the firm you send clients to should make that signature easier to stand behind. Hold every provider to these five, CSSI included.

Have a client with a building you think might be a candidate? Call 770-224-8504, option two. If a study doesn't make sense for that client, I'll say so, and there's no obligation and no pitch.

The service details are at davidhwiener.com/cost-segregation. Cost segregation, 179D and R&D credit studies are delivered through my relationship with CSSI (Cost Segregation Services, Inc.).

This article is educational and is not tax, legal, or accounting advice. Every situation is different; work with a qualified tax professional before acting on any strategy described here.