Cost Segregation Glossary

Study process

Cost segregation — identifying building and site components and assigning each to a MACRS class instead of treating the improvement as one 27.5- or 39-year asset. The study does not create depreciation. It rearranges the timing of the allowance §167 already provides, using the classes §168 already defines.

Look-back study — a study of property already placed in service, usually implemented as an accounting-method change rather than amended returns. The catch-up is the §481(a) adjustment. Whether a given taxpayer may use the automatic change on Form 3115 is a CPA determination under Rev. Proc. 2025-23 and Rev. Proc. 2015-13.

Quality study — the Audit Techniques Guide’s description of a study that inspects, documents, estimates from cited sources, and reconciles to basis. Chapter 4 lists thirteen principal elements, including a preparer with expertise, a described methodology, appropriate documents, interviews, common nomenclature, a standard numbering system, legal analysis, take-offs and unit costs, asset lists that tie to the ledger, reconciliation, treatment of indirect costs, a listing of §1245 property, and related issues such as §263A and method changes. The guide also says the Service has not prescribed a required format or required credentials.

Rule-of-thumb study — applying a fixed percentage from “industry averages” with little or no documentation. Publication 5653 ranks that approach last among six methods, tells examiners to view it with caution, and also tells them not to reject it categorically. This library does not treat a rule-of-thumb percentage as a result.

Detailed engineering from actual cost records — the Audit Techniques Guide’s first and, in its words, generally most methodical and accurate approach. It uses contemporaneous contracts, pay applications, change orders, and invoices, usually on new construction. Detailed engineering cost estimate — the same steps when those records are missing, typically on an acquisition, using contractor prices or cited published unit costs. Residual estimation — costing only the short-lived items and dropping the remainder into the building; the guide calls it simpler and often less accurate. Sampling or modeling — applying a percentage model from near-identical facilities; the guide warns that a small population can limit accuracy. Survey or letter — asking contractors what they installed, reliable when the answers are about this project and unreliable when they are about some other project.

Classification vocabulary

Tangible personal property — property that is not a building or a structural component, tested under Treas. Reg. §1.48-1 and the Whiteco factors. The regulation’s examples include machinery, grocery counters, display racks, and signs. Local law that calls an item a fixture does not decide the federal question.

Structural component — a part of a building listed in Treas. Reg. §1.48-1(e)(2), such as walls, floors, roofs, and central HVAC, plumbing, and wiring, plus other components that relate to the operation or maintenance of the building. A listed component is the starting point, not the end of every inquiry: dedicated equipment wiring and sole-justification machinery are the usual exceptions discussed on the asset pages.

Sole justification — the regulation’s exception for machinery the sole justification for which is to meet temperature or humidity requirements essential for other machinery or for processing materials or foodstuffs. Incidental employee comfort does not automatically destroy the exception. The Audit Techniques Guide’s textile-plant humidification example is examiner commentary on that regulation, not a second test.

Functional allocation — splitting a system, often electrical, between building use and process or equipment use based on design or measured load (Scott Paper). Publication 5653 discusses the approach and the later IRS statement that the Service would not challenge a properly applied allocation of primary and secondary electrical distribution. It is not a license to split every plumbing stack by fixture count.

Inherently permanent — Whiteco’s inquiry into whether an item is a building or other inherently permanent structure rather than personal property. The six factors are movability and whether the item has been moved; design to remain permanently in place; intended duration of affixation; difficulty and cost of removal; damage on removal; and manner of affixation. No single factor is written in the opinion as a standalone switch.

Section 1245 property — depreciable personal property and certain other tangible property described in §1245(a)(3). Buildings and their structural components are generally outside that definition. Gain on a later sale is recaptured as ordinary income to the extent of depreciation previously taken. A study that moves basis into §1245 classes is also moving later recapture into ordinary income.

Section 1250 property — depreciable real property that is not §1245 property. Recapture under §1250 is limited to additional depreciation, meaning depreciation in excess of straight line. Most MACRS buildings are already straight-line, so the remaining character issue is often unrecaptured §1250 gain rather than classic §1250 recapture. This glossary does not state a rate that was not confirmed on an opened page.

Land improvement — site work that is not the building and not the land, typically recovered as 15-year property under Rev. Proc. 87-56 class 00.3 as reproduced in Publication 946 Appendix B: sidewalks, roads, drainage, fences, and landscaping, excluding buildings and structural components. Some petroleum-marketing site items fall in class 57.1 instead. Activity classes can pull land improvements into a different recovery period; Publication 946’s paper-manufacturer example is the warning.

Words this library refuses to treat as classes

CSI division — a construction specification heading. Division 22 is plumbing; Division 26 is electrical. Those headings file contractor work. They do not assign MACRS lives.

Pay-application line — a billing group on an AIA-style continuation sheet. One line can mix house fixtures and process equipment. It is a cost source, not a class.

Unit of property — the tangible-property-regulation unit used to test betterment, restoration, and adaptation. For a building, the structure and each listed building system are separate units. That is a capitalization unit, not a recovery class.

Industry average — a marketing phrase. Publication 5653’s rule-of-thumb discussion is the only official treatment this library uses, and the guide tells examiners to view that approach with caution.