If a client's study is examined, the revenue agent works from the IRS Cost Segregation Audit Techniques Guide, Publication 5653, most recently revised February 2025. It is public, specific, and it tells you in advance what the examiner is looking for. Most practitioners have heard of it. Far fewer have read it against a study on their desk.
The short answer
- The ATG is examiner guidance, not law. It creates no safe harbor. But the IRS does not publish an examiner manual for a strategy it considers abusive, which is itself reassurance.
- The guide lists 13 principal elements of a quality study. Preparer credentials, methodology, documentation, and cost reconciliation carry the weight.
- The ATG recognizes six methodologies, and they are not equal. The Detailed Engineering Approach from Actual Cost Records is most defensible; rule-of-thumb approaches are challenged first.
- The February 2025 revision added guidance on §179D, bonus/QIP/§179 interaction, switchgear allocation by electrical load, and open-air parking.
What the ATG Is, and What It Is Not
The ATG is an internal training and examination aid giving revenue agents a consistent framework for reviewing studies. It summarizes the law, walks through methodologies, and catalogs the errors examiners find. It is not a regulation, and nothing in it overrides the Code or case law. But building a study to it is good practice: it is the checklist the work is reviewed against.
The legal foundation underneath all of it is Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997), which validated component-based segregation of building costs into §1245 personal property.
The 13 Principal Elements, Grouped
They read as a flat list. They organize better in four groups.
Preparer credibility. (1) A preparer with expertise in both construction and tax. (4) Interviews of appropriate parties: owner, contractor, property manager, or staff who know what the building contains.
Methodology. (2) A detailed description of the methodology used. (8) Unit costs and asset groupings. (9) An engineering or economic rationale for each allocation.
Documentation. (3) Appropriate documentation: construction records, invoices, drawings. (5) Common nomenclature. (6) A standard numbering system. (12) Treatment of indirect costs, explained.
Legal analysis and reconciliation. (7) The legal analysis supporting the classifications. (10) Identification and listing of §1245 property. (11) Reconciliation of total allocated costs to total actual costs. (13) Listing of §1245 property supporting a partial disposition.
Element 11 fails most often and is easiest to test. If allocated costs do not add back to actual total cost, nothing else matters. Our breakdown of what belongs in 5-, 7-, and 15-year classes shows elements 9 and 10 asset by asset.
The Six Methodologies, and How Far Each One Will Carry You
The ATG describes six approaches. It identifies the Detailed Engineering Approach from Actual Cost Records as the most reliable and rule-of-thumb approaches as the least, but it does not publish a numbered one-through-six ranking. The ordering below is ours: how the four methods in between tend to hold up in practice, listed strongest first.
| Methodology | When it is appropriate |
|---|---|
| Detailed Engineering from Actual Cost Records | New construction with complete cost records. The ATG's most reliable approach. |
| Detailed Engineering Cost Estimate | Acquired buildings with no cost records. The working standard. |
| Survey or Letter | Contractor-supplied costs, no independent engineering. |
| Residual Estimation | Price the §1245 property, assign the rest to the structure. Weak on reconciliation. |
| Sampling or Modeling | Large portfolios of similar properties, documented sampling plan. |
| Rule of Thumb | The ATG is explicit: least reliable, poorly documented. |
A report that cannot name its methodology, or names one from the bottom of that list, is a liability. That is the real difference between engineering-based and software studies.
What the February 2025 Revision Added
§179D interaction. Coordination between the energy efficient commercial buildings deduction and cost segregation basis. Note separately that OBBBA terminates §179D for property beginning construction after June 30, 2026.
Bonus, QIP, and §179 interaction. How reclassified property flows into §168(k) bonus, QIP treatment, and §179 expensing.
Primary electrical switchgear allocated by electrical load. Switchgear serving both building operations and dedicated process equipment is allocated on connected electrical load, not floor area.
Stand-alone open-air parking structures are 39-year property. A specific answer to a recurring question.
Worked Example: Reconciliation and Load Allocation
Example: a $6.8M flex/manufacturing building with complete cost records Direct costs of $5,780,000 plus $1,020,000 of indirect costs (general conditions, GC fee, architecture, permits), allocated pro rata per element 12.
| Asset class | Allocated cost | % of basis |
|---|---|---|
| 5-year personal property | $1,224,000 | 18.0% |
| 15-year land improvements | $748,000 | 11.0% |
| 39-year real property | $4,828,000 | 71.0% |
| Total allocated | $6,800,000 | 100.0% |
That is element 11: allocated costs tie exactly to actual cost, no plug, no rounding line.
Inside it sits the switchgear question. The building's $340,000 primary switchgear serves both general building load and dedicated process equipment. A connected-load study shows 46% of load serving that equipment, so $156,400 goes to 5-year property and $183,600 stays in the structure. A square-footage or 50/50 split would not survive the 2025 guide.
Where Most Studies Fall Short, and a Checklist to Catch It
Many studies sold today do not meet these elements, and some do not attempt to. That is an uncomfortable position for a CPA: you sign the return, the client chose the provider, and the report may be the weakest document behind the position.
| Check | Pass looks like | Fail looks like |
|---|---|---|
| Preparer | Named engineer, construction and tax background | "Our proprietary platform" |
| Methodology | Named ATG methodology, described | Not stated anywhere |
| Site visit | Inspection or full plan record, plus interviews | Desktop only |
| Reconciliation | Allocated costs tie to actual total cost | A residual plug |
| Land | Appraisal, assessor ratio, or contract | Unexplained low number |
| Asset detail | Line items with class life, convention, in-service date | Four summary buckets |
| Audit support | Written commitment to defend the report | Silence in the engagement letter |
Run it before the return goes out, not after a notice. If a report fails reconciliation or preparer qualification, raise it while there is time to fix or replace it. See also choosing a provider, what drives audit exposure, and the CPA intake screen.
Frequently Asked Questions
Does following the ATG guarantee the study will be accepted?
No, and no provider can promise that. The ATG is examiner guidance, not a safe harbor. Following it means the report answers the questions an examiner is trained to ask. That is the most documentation can do for any position on a return.
Is a site visit required by the ATG?
The guide imposes no rigid requirement, but elements 3 and 4, appropriate documentation and interviews of appropriate parties, are hard to satisfy without inspecting the property or working from complete construction records plus conversations with people who know it.
How much weight does Hospital Corporation of America still carry?
It remains the foundational modern authority for separating §1245 components from §1250 real property, and it is why the IRS wrote an audit guide rather than attacking the concept.
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This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.