O'Connor outlines what can and cannot be included in cost segregation

O'Connor says property owners need to separate real, tangible and intangible assets correctly in cost segregation studies as the October 15 extension deadline approaches. The firm warns that using ineligible property can trigger IRS audits and weaken expected tax savings.

Why it matters: - Cost segregation can accelerate federal tax deductions, but only if property is classified correctly. - Mistakes in asset categorization can lead to IRS audits and possible consequences. - The October 15 extended filing deadline leaves businesses less time to complete and verify a study.

What happened: - O'Connor published an explanation of real, tangible and intangible property in cost segregation. - The firm said cost segregation applies to real property and tangible property, but not intangible assets. - O'Connor tied the guidance to business owners looking to reduce federal income taxes.

The details: - Real property includes land, buildings, permanent structures and property that cannot be moved. - Real property typically depreciates over 27.5 years or 39 years. - Tangible property can be touched, moved or physically interacted with. - Tangible assets can often be assigned to five-, seven- or 15-year depreciation schedules. - Examples of tangible property include carpeting, lighting, fixtures, flooring and furniture. - Other tangible assets listed include fencing, landscaping, pavement, parking areas, vehicles, machinery, appliances, computers, signage, HVAC systems, ductwork, boilers and water heaters. - Intangible assets cannot be used for cost segregation. - Intangible property listed includes software, warranties, contracts, patents and intellectual property. - Computers and servers can qualify as tangible assets, while the software inside them does not.

Between the lines: - The guidance reflects a common tax-planning problem: assets that are part of a building can still qualify for faster depreciation if they are tangible personal property. - The firm said many CPAs know about cost segregation but do not raise it with clients because the process is difficult. - The IRS generally expects an engineering approach to cost segregation, which raises the bar for accuracy. - In a more digital business environment, separating software from hardware remains an important distinction.

What's next: - Businesses with extensions will need to finish cost segregation work before the October 15 deadline. - Property owners planning a study will need to verify asset categories carefully before filing. - O'Connor said professional support can help break down real estate into individual assets and reduce missed depreciation opportunities.

The bottom line: - Cost segregation works best when real, tangible and intangible property are separated precisely, because eligibility drives the tax benefit.