If you own or operate multiple “chain” type properties such as restaurants, retail stores, hotels, supermarkets, or service centers, the most cost effective way to take advantage of many available tax incentives involves using statistical sampling.
Some popular applications of statistical sampling occur with Cost Segregation, Repair & Maintenance Tax Studies, Research & Development Credits, and Section 199 Manufacturing Deductions, among others.
Statistical sampling allows a taxpayer to analyze a small random number of items from a large population and apply the results of the analysis to the entire population. In order for the IRS to accept the methodology as valid, guidelines on statistical sampling must be followed and can also require a professional statistician.
Generally, the IRS will not challenge the use of a statistical sampling as long as there is a “compelling reason for its use and taxpayers cannot reasonably obtain more accurate information.”Further, the appropriateness of using a probability sample is a “facts and circumstances” determination. Factors to consider are: the time required to analyze the large volumes of data, the cost of analyzing the data, and whether other records exist that may independently have a greater probative value.
New Developments with Statistical Sampling Guidelines
The IRS released “Field Directive on the Use of Estimates from Probability Samples” on November 3, 2009. This updated guidance loosens some prior limitations on how tax benefits are calculated. Previously, the guidelines required a subtraction of the sampling error from the results that would be applied to the entire population. The new “Directive” eliminates that requirement if the sampling error is less than 10 percent. If it’s greater than 10 percent, the new guidance allows for a phased in subtraction of the sampling error. This may have a significant impact on your final tax calculation.
KBKG recently conducted a statistical sampling for a public retailer. The population of stores analyzed consisted of 125 leased locations with roughly $400,000 of leasehold improvement costs at each. These locations were opened at various times over the last 10 years. The results of our study generated $13 million of additional tax deductions in the first year while our fees were minimized by only analyzing a small number of locations.
To find out if you might benefit from this opportunity, feel free to contact Gian Pazzia at 626.449.4225 x150
Author: Gian Pazzia, CCSP