ing fixtures, stairs and elevators and sprinkler systems. All good cost segregation studies end with a cost segregation report. Tese reports vary but should contain some basic information: • Summary—This will contain the preparer, the date of the study, the taxpayer (or client), the subject property, etc.
Farrar Corp. was able to change the depreciation on several areas of its metalcasting facility and the heat treat facility it installed in 2007.
for the electrical, mechanical and other systems associated with the building), the study requires engineering special- ists who are familiar with the analysis required for the study. Te engineering report or cost
segregation report starts by segregating assets into four categories: • Personal property. • Land improvements. • Buildings. • Land. Personal property. Tis normally can
be depreciated over a five- to seven- year period. Tis category includes items such as furniture, carpeting, certain fixtures and window treatments. Land improvements. Like personal
property, this category has a short useful life (15 years) and is subject to an accelerated depreciation method. Tis category includes items such as sidewalks, fences and docks. Buildings. As with the two catego-
ries above, metalcasters should attempt to maximize their building’s value. Any residual value will be allocated to non- depreciable land. Although a building’s separate components all are considered part of the building itself, value can be found through depreciating each component separately. So, if one of the building’s components subsequently becomes worthless, you can write it off immediately. Land. Land is basically valued at the amount of the purchase price not accounted for in the above three cate- gories. Land valued in this manner may have a relatively insignificant value, but with proper documentation, you will be
28 | MODERN CASTING June 2012
protected from any IRS challenge. Te challenge when categoriz-
ing property lies in distinguishing between tangible personal property and a building made up of its struc- tural components. According to the Internal Revenue Code and U.S. Treasury Department regulations, the distinction between tangible personal property and structural components should be based on the criteria once used to determine whether prop- erty qualified for the now repealed investment tax credit. Te Treasury regulations define tangible personal property as all property “except land and improvements thereto, such as buildings or other inherently per- manent structures (including items which are structural components of such buildings or structures).” Te regulations further define tan- gible personal property as “all property (other than structural components) which is contained in or attached to a building.” It says examples of such property consist of printing presses, transportation and office equipment, refrigerators and display racks. Te Treasury regulations classify as
structural components any property that “relates to the operation or main- tenance of a building” and includes, by way of example, parts of a building (walls, floors and ceilings), as well as any permanent coverings (paneling, windows and doors), components of a central air conditioning or heat- ing system (motors, pipes and ducts), plumbing and fixtures (sinks and bathtubs), electrical wiring and light-
• Narrative Report—This section generally includes a more detailed description of the property/facility, as well as a legal description.
• Schedule of Assets—Generally, this schedule ties directly to the tax- payer’s depreciation records.
• Schedule of Direct and Indirect Costs—This will show the indi- rect costs allocated to property as defined by the appropriate section of the Internal Revenue Code, which should be clearly identi- fied and explained. It also will list separately-acquired assets and costs.
• Schedule Of Property Units and Costs—This schedule shows units and costs with property descrip- tions segregated into land and the different kinds of property defined in the tax code.
• Engineering Procedures—This will show the engineering procedures and methodology for determining the cost of each property unit.
• Statement of Assumptions and Limiting Conditions—The section describes the general understand- ing and conditions that apply to the report.
• Certif ication—This section certi- fies that the person who signed the report actually developed the analysis, opinions and conclusions of the report.
• Exhibits—The exhibits section will include various items, such as accounting records, cost sources, photographs, fixed asset ledger reconciliations, etc.
ONLINE RESOURCE
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www.moderncasting.com for an additional article on the Research & Devel- opment Tax Credit.
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