Our Cost Segregation Methodology: 13 Principal Elements Compliant

Every WeCostSeg engagement follows the detailed engineering approach from actual cost records described in Chapter 3 of IRS Publication 5653. Every report addresses all 13 Principal Elements of a Quality Cost Segregation Study from Chapter 4. The methodology is the same across our three pricing tiers; the difference between tiers is scope and inspection depth, not methodology.

The IRS Cost Segregation Audit Techniques Guide

The IRS published the Cost Segregation Audit Techniques Guide in 2004 with major updates in 2022 and February 2025. The Guide describes how examiners evaluate cost segregation studies and what constitutes a quality study. Reading the Guide is the most useful preparation any investor or CPA can do. The current edition is available at irs.gov/pub/irs-pdf/p5653.pdf. Our summary is on the IRS Pub 5653 plain-English page.

The six methodologies (Pub 5653 Chapter 3)

1. Detailed engineering approach from actual cost records
2. Detailed engineering cost estimate approach
3. Survey or letter approach
4. Residual estimation approach
5. Sampling or modeling approach
6. "Rule of thumb" approach

The Guide describes the detailed engineering approach from actual cost records as the most accurate. We default to this method. The residual estimation and rule-of-thumb approaches are explicitly identified as the least defensible.

The 13 Principal Elements (Pub 5653 Chapter 4)

1. Preparer's qualifications and credentials
2. Detailed cost-by-cost itemization with appropriate justification
3. Methodology disclosure
4. Allocation of indirect costs
5. Documented assumptions and limitations
6. Identification of personal property and land improvements
7. Treatment of intangibles and land
8. Documented support for asset classification (Section 1245 vs 1250)
9. Recovery period justification
10. Photographic documentation
11. Source documentation referenced and archived
12. Mathematical accuracy and computation verification
13. Citations to case law and revenue rulings where relevant

How our reports address each element

Every WeCostSeg study report opens with a methodology disclosure citing the Pub 5653 detailed engineering approach. Each asset line carries a recovery period justification and a Section 1245 or 1250 classification with a brief rationale. Photo logs are archived for the five-year audit defense period. Citations to relevant Tax Court opinions (HCA v. Commissioner is the foundational case) and IRS revenue rulings are included where applicable.

Why "engineering" matters

The Audit Techniques Guide consistently uses the word "engineering" in describing what distinguishes a quality study from a questionnaire-driven product. The engineer's qualifications are Principal Element #1. Software that returns a study without engineer review fails this element. Our Rapid Report tier is software-assisted but always engineer-reviewed and engineer-signed; this is what distinguishes it from DIY tools.