Statistical Sampling Approach
Often, the full tax benefits of a cost segregation analysis can be obtained by looking at just a small
sample of total assets. Our statistical experts take advantage of the latest IRS Revenue Procedures
(found in Rev. Proc. 2007-35 and Rev. Proc. 2004-29) to draw the sample as efficiently as possible
and extrapolate from the sample to the population of assets.
We perform our studies in phases to ensure that “relative precision” targets as required by the IRS
can be met without sampling more locations (stores / restaurants / etc.) than necessary.
- Phase one is a pilot study to estimate the variance of reclassified property.
- Phase two incorporates the variance estimates to complete the sampling as efficiently as
Our phased approach takes all the guesswork out of sampling. By neither sampling too many
locations nor too few, we are able to maximize the tax benefits to the client.
CASE IN POINT
- For a national, fast-food restaurant chain, our statistician developed a statistical model to
estimate the fixed assets that could be reclassified from 39-year real property to five-year
personal property. This statistical model was reviewed and accepted, on audit, by the IRS.
A stratified sample design enabled the selection to be as small a sample as possible, thus
minimizing the amount of work performed by our cost segregation analysts completing the
- For the past five years, our statistician has performed an annual sampling analysis of new
acquisitions and new construction projects by one of the nation’s largest retail banks. Our
cost-segregation model extrapolates from the sample to produce population estimates of
five-year personal property. The work has withstood IRS review all five years.
- For a retailer with locations at hundreds of malls across the U.S., our statistician conducted
a sampling analysis for cost segregation purposes. The sample was designed to meet the
“10-percent relative precision target” (found in Rev. Proc. 2007-35 and Rev. Proc. 2004-29.)
For clients with space in dozens or hundreds of locations, Madison SPECS’ use of statistical
sampling is an invaluable tool that saves both time and money. Statistical sampling makes cost
segregation an even more effective strategy for generating tax benefits and increasing cash flow.