Cost Segregation and the Former Investment Tax Credit (Portfolio 583)


James Liechty

Tax Law Specialist

IRS Office of Chief Counsel

At a glance

I. Introduction

II. Part 1 – Cost Segregation

a. 1:II Cost Segregation

b. 1:III List of Items and Authorities for Cost Segregation Analysis

III. Part 2 – The Former Investment Credit

a. 2:IV The Former Investment Credit

b. 2:V Application of the Former Investment Credit

c. 2:VI Property Eligible for the Former Investment Credit

IV. Working Papers

a. Table of Worksheets

b. Worksheet 1 Portion of the 1962 Investment Credit Legislative History

c. Worksheet 2 Portion of the 1978 Investment Credit Legislative History

d. Worksheet 3 Cost Segregation Flow Chart

e. Worksheet 4 Sample Client Letter and Prototype for Cost Segregation Study

f. Worksheet 5 Sample Depreciation Accounting Method Change

g. Worksheet 6 Sample Section 481(a) Adjustment Calculation


Bloomberg Tax Portfolio Cost Segregation and the Former Investment Tax Credit Portfolio 583, No. 583, provides a detailed discussion of cost segregation and the repealed investment credit. Part 1 (Sections II. and III.) discusses cost segregation, including portions of the investment credit that are applicable for purposes of segregating costs. Part 2 (Sections IV., V., and VI.) largely discusses the repealed investment credit, though portions that relate to § 50 include a discussion of former investment credit provisions that are applicable under current law.

With respect to cost segregation, the Portfolio includes a detailed discussion of considerations related to determining when to do a cost segregation study, accounting method change considerations related to cost segregation studies, properly classifying property for depreciation purposes, and documenting conclusions, including a sample report. The Portfolio also provides an extensive summary of case law and IRS published guidance related to determining whether property is properly treated as a building or personal property for depreciation purposes. This body of law is largely based on investment credit rules and is also applicable for purposes of § 179, § 1245, § 1250, and other provisions of the code. Determining the applicable recovery period of segregated property is outside of the scope of this Portfolio and is discussed in detail in 531 T.M., Depreciation: MACRS and ACRS.

With respect to the former investment credit, the Portfolio provides a detailed discussion of the statutory rules that allowed a credit against income tax on a portion of the purchase price of machinery, equipment, and other selected types of productive assets and their utility in determining cost segregation of buildings and other assets to maximize tax benefits. The Portfolio discusses the rules as to what property qualified for the investment credit, how the former investment credit was computed, various limitations on the amount of former investment credit available in a taxable year, and elections to allow the credit to lessees.

For a detailed discussion of the rules governing the investment credit at-risk rule, see 550 T.M., At-Risk Rules.

For a detailed discussion of the overall operation of income tax credits, see 506 T.M., Principles of Income Tax Credits.

This Portfolio may be cited as Liechty, 583-3rd T.M., Cost Segregation and the Former Investment Tax Credit.

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