Illustrative Bundled Contractor Costs
How a study unbundles a single “electrical” pay-application line into building lighting and dedicated equipment circuits. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume new restaurant construction with AIA pay applications. One line is “Division 26 Electrical.”
- The “$1” figure in the original teaching line is an invented placeholder for arithmetic, not a real invoice.
- Scott Paper-style function is applied only to primary and secondary electrical distribution after dollars are split. It is not extended to plumbing or HVAC as an IRS-accepted method.
Key takeaways
- A CSI division is not a recovery class. Split the dollars before assigning a class.
- Scott Paper-style function is applied after the dollars are split, and only with load evidence for electrical distribution.
- Change orders that stay bundled have to be allocated on a stated method.
- Unbundling is an estimate. The report should say so. False precision is worse than a documented allocation.
The contractor billed “Division 26 Electrical — $1.” That line is an invented placeholder. In a real file the dollars would be the actual pay-application amount. The line includes service, house lighting, and kitchen equipment panels. Drawings and a panel directory are used to split the dollars before any class is assigned.
Only after the split does the study call dedicated kitchen circuits 5-year and house lighting building, following the restaurant matrix as a map. The method of splitting the lump sum is written down so it can be reversed. Educational information, not tax advice.
Order of operations on a mixed CSI line: identify total electrical cost including change orders; map circuits to function from drawings and inspection; allocate dollars on a stated method (design load, outlet counts, or contractor unit prices); classify each bucket; reconcile so the buckets add back to the original line plus its share of indirects. Do not start with a class and back into a dollar.
Honesty about precision
Unbundling is an estimate. The report should say so. False precision is worse than a documented allocation. If the split is 62.4% building because a spreadsheet divided connected load to two decimal places, the reviewer should still be able to re-perform the arithmetic from the panel schedule. The ATG’s quality elements include a detailed description of methodology, unit costs and engineering take-off, and reconciliation to actual costs.
Examiners compare study costs to AIA G-702/G-703 records. A study that reports more electrical personal property than the entire Division 26 total has failed reconciliation. Indirects — general conditions, tax, overhead — should be allocated on the same method used for other divisions, and the method should be stated.
What functional allocation is — and is not
Scott Paper Co. v. Commissioner allocated mill electrical by function. Morrison affirmed functional allocation in a restaurant setting. The IRS, in AOD 1991-019 as described in the ATG, will not challenge the approach for primary and secondary electrical distribution. The §1245 share requires a design-load (demand-load) functional allocation; the ATG suggests engineering support.
That acceptance does not extend to plumbing or HVAC as an IRS-accepted method. Dedicated kitchen gas, water, and drain lines can still be 5-year in the restaurant matrix because of those rows, not because Scott Paper was copied onto pipe. A rooftop unit that serves dining and kitchen is not allocated by square footage; the restaurant matrix says allocation of HVAC is not appropriate.
Change orders and later packages
A late change order that adds a walk-in cooler and its dedicated feed should follow the cooler, not be dumped into “electrical — building” because the original G703 line was labeled lighting. Conversely, a change order that only adds corridor fixtures stays with the building. If the change order is itself a lump sum, allocate it on the same stated method and say so.
Vendor-installed equipment that arrives with its own whip should not be estimated a second time out of Division 26. The ATG warns against double-counting separately acquired FF&E.
Other bundled divisions
The same discipline applies to millwork (decorative versus restroom casework), flooring (strippable VCT versus ceramic), and site work (lot versus building-attached canopy). CSI MasterFormat is a numbering system the ATG lists as a quality element; it is not a MACRS table. Use a common nomenclature. Do not relabel sewage piping as process piping.
CostSeg SI describes extraction of pay-application lines as a proposed Super Intelligence stage. A person still confirms the split. This illustration does not claim operational automation or an IRS-approved format. The ATG states the IRS has not established preparer requirements or a standard report format.
Filing
After classes are assigned, the CPA applies conventions and §168(k) as of Notice 2026-11 on Form 4562. This page does not compute a taxpayer’s tax and does not present an electrical reclass percentage as typical. Suppose, for arithmetic only, the entire invented $1 electrical line is split after inspection into house lighting and a kitchen equipment panel. Those buckets must add back to $1 plus their share of indirects. The split is an estimate written so it can be reversed, not a claimed typical kitchen share.
If the job is a look-back on a building already in service, unbundling historical pay applications feeds a method-change discussion (Form 3115 / §481(a)), referred to the CPA. Eligibility and designated change numbers are generally CPA questions (F-04). Educational information, not tax advice.
Sources
- 1IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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