CPA Checklist for Evaluating Cost Segregation Studies

A standardized CPA cost segregation checklist provides consistency, reduces oversight risk, and documents the review process. Without a checklist, CPAs may miss important elements or apply different standards across client engagements.

The checklist serves multiple purposes: it guides the review process, provides a record of due diligence, communicates expectations to study providers, and helps train staff on evaluation standards. Over time, the checklist becomes a core quality control tool.

For CPAs building a cost segregation practice, a standardized checklist is essential infrastructure that supports scalable, repeatable processes.

The cost seg evaluation checklist should be organized into logical categories that correspond to key study elements. This organization makes the review process systematic and ensures that all critical areas are covered.

Recommended checklist categories

• Site inspection and property documentation
• Methodology narrative and approach
• Asset listings and component classifications
• Cost allocation methodology and support
• Documentation completeness and quality
• IRS guidance compliance and references
• Provider qualifications and credentials
• Data format and tax software compatibility

Each category should include specific items that can be verified with a yes or no answer or a brief comment. This structure keeps the review focused and efficient.

Site inspection verification is the first and most critical category. Studies without a documented site inspection should be rejected immediately, as this is a foundational requirement under IRS guidance.

If any required items are missing, the CPA should request them from the provider before proceeding. Site inspection documentation is non negotiable.

The methodology section explains how the study was performed. CPAs should verify that the methodology is detailed, property specific, and aligned with IRS standards.

Methodology checklist items

• Methodology narrative is detailed and property specific, not generic boilerplate.
• Sources of cost data are identified and documented (settlement statement, construction invoices, appraisals).
• Cost allocation methods are explained (residual, comparative unit, engineering estimates).
• Component identification process is described (physical inspection, blueprint review, quantity takeoff).
• Classification rationale is provided for key components.
• Methodology references the IRS Audit Techniques Guide and applicable revenue procedures.

Generic or vague methodology narratives are red flags. The methodology should provide enough detail that another qualified professional could understand the approach.

Asset listings are the core deliverable of the cost segregation study. CPAs should verify that listings are complete, detailed, and supported by reasonable classifications.

CPAs should flag any classifications that seem questionable and request supporting rationale from the provider. Aggressive or unsupported classifications increase risk.

Cost allocation is how the total property basis is divided among components. CPAs should verify that allocations are supported, reasonable, and reconcile to known cost basis.

Cost allocation checklist items

• Total allocated cost matches known property basis (purchase price, construction costs).
• Land value is excluded from depreciable basis and properly documented.
• Allocation methods are explained and supported (invoices, comparative data, engineering estimates).
• Allocations to personal property and land improvements are reasonable for the property type.
• Any indirect costs or soft costs are allocated appropriately.

Misallocations or unexplained discrepancies should be addressed before the study is accepted. CPAs should request detailed workpapers if allocations are not clear.

Complete documentation is essential for audit defense. CPAs should verify that the study includes all required supporting documents and that the documentation is organized and accessible.

Documentation checklist items

• Executive summary explaining study scope and conclusions.
• Detailed methodology narrative.
• Complete asset listings by class with descriptions and costs.
• Site inspection photos and notes.
• Cost data sources (settlement statements, invoices, appraisals).
• Engineer credentials and qualifications.
• References to IRS guidance and applicable authorities.
• Form 3115 template or calculation support if applicable.

Missing documentation should be requested and received before implementation. The CPA should retain a complete copy of all documents with the tax return workpapers.

IRS guidance compliance is a key quality indicator. CPAs should verify that the study references and follows the IRS Audit Techniques Guide, applicable revenue procedures, and relevant case law.

IRS guidance checklist items

• Study references the IRS Audit Techniques Guide for Cost Segregation.
• Methodology aligns with IRS recommended approaches (detailed engineering, residual method, etc.).
• Component classifications follow IRS asset class definitions.
• Study cites relevant revenue procedures, private letter rulings, or court cases where applicable.
• Any positions that deviate from standard guidance are explained and supported.

Studies that ignore or contradict IRS guidance should be questioned. Compliance with published IRS standards reduces audit risk and improves defensibility.

The checklist should be completed for every cost segregation study before implementation. CPAs can adapt the checklist to their practice and add firm specific items as needed.

For CPAs interested in building systematic cost segregation practices, the complete CPA cost segregation guide provides comprehensive coverage of all key processes. Additionally, resources on partnership opportunities for CPAs can help integrate checklists into broader service offerings.