Have you or are you planning on building/remodeling your dealership?
Do you want to reduce your federal tax liability?
If you answered "yes" to either of the two questions above, then a cost segregation study is right for you.
A cost segregation study analyzes a building and identifies the components that qualify for shorter federal tax lives than the 39-year life (straight line depreciation) required for automobile dealerships. These shorter lives are depreciated at an accelerated rate (5, 7, or 15 years) giving you a larger current depreciation expense, which in turn reduces your federal taxable income.
The 2010 Tax Relief Act increased bonus depreciation from 50% to 100% for a limited time. What does this mean for cost segregation? It means you can write off 100% of the cost of depreciable assets with a tax life of less than 20 years in the first year of service. This includes all property identified as 15-year sitework, in addition to 5-year or 7-year personal property. The result is significantly increased depreciation expense. Qualifying assets must be placed in service between September 9, 2010 and January 1, 2012. After that date bonus depreciation will be reduced to 50% for the calendar year 2012.
Scenario
A taxpayer constructs a new automobile dealership for $6.6 million (excluding land and personal property).
If no study is performed:
The taxpayer enters the entire cost into their fixed asset system as 39 year property. After the first five years, they have a total of $769,968 in accumulated depreciation expense.
With a cost segregation study:
After a thorough engineering analysis combined with an understanding of what qualifies as short life (Sec. 1245) property, the automobile dealership is reclassified into $571,397 of 5-year property, $271,183 of 7-year property, $1,381,819 of 15-year property, and $4,386,472 of 39-year property. A report is generated in electronic format and an Excel file is provided for seamless transition to update the fixed asset system with the new entries. If the project qualifies for 100% bonus depreciation, the first year depreciation deduction is $2,285,415! With 50% bonus depreciation, the first year depreciation deduction is $1,284,290.
Analysis:
The difference is that the taxpayer has increased the accumulated depreciation expense by $1,515,447. With a cost segregation study, the taxpayer has taken the majority of their depreciation "up front" and realizes that a dollar saved in the first five years is worth more than the same dollar 16 years from now. The end result when comparing having a study performed or not having a study performed is a net present value savings of almost $560,000!
Updates:
A recent Tax Court case confirmed the tax treatment of site lighting fixtures and poles as 7-year personal property. Cost segregation studies identify such assets and separate them out for favorable tax recovery treatment. Other common automobile industry qualifying items include: decorative bollard lighting, carpeting, removable cabinetry, compressed air systems and piping, vehicle exhaust systems, equipment related electrical connections, and decorative lighting fixtures such as track lighting and accent wall lighting.
In recent years, the IRS published a series of Field Directives identifying other items that qualify. Although the directives are not official pronouncements of the law or IRS position, they provide valuable guidance for a broad range of industries. Along with the IRS Audit Technique Guide from 2004, the IRS is now scrutinizing cost segregation more closely, reinforcing the need for well-documented studies such as those we provide.
Now is the time to ask our professionals for help. Contact your account director or any member of our real estate and construction team, or call Mark Vorkapich at 888-556-5580 or 414-465-5503.
Mark Vorkapich, ASA, specializes in cost segregation studies for new construction, purchase price allocations, 1031 exchanges and look-back studies. Mark is on our cost segregation team and real estate and construction team.