Could you use a tax strategy that can save you significant tax dollars and boost cash flow? If so—and who doesn’t want to save tax?—consider looking into a cost segregation study on the dealership real estate you own. It could save you a bundle.
Accelerating Depreciation—Newly constructed real estate as well as previously acquired
You may be eligible to save taxes through accelerated depreciation on both newly constructed real estate, as well as retroactively save taxes if you have purchased real estate, built a new showroom, renovated facilities or expanded property in the last decade or so.
Traditionally, dealers depreciate nonresidential buildings and improvements over 39 years using the straight-line depreciation method. A cost segregation study allows you to depreciate certain property components more quickly and boost your cash flow.
How? The study identifies, segregates and reclassifies qualifying property into asset groups with shorter depreciable lives of five, seven or 15 years. These shorter-lived assets are also typically eligible for the modified accelerated cost recovery system (“MACRS”) rather than straight-line depreciation. Net result: You get larger deductions in the earlier years of an asset’s life.
Take a look at what’s included in the value of your real estate. Generally, the gross amount will include such things as carpeting, window treatments, wiring dedicated to personal property, cabinetry, lighting, driveways, wall coverings and cubicles, landscaping and drainage. Soft costs, such as architectural fees, might also be counted. All of these items and others potentially can be carved out and depreciated more quickly than standard real estate.
As stated above, these tax savings can be obtained on newly constructed real estate. For an example with previously acquired real estate, suppose a dealer spent $6 million on a new showroom in 2005. In 2015, his CPA works with specialized professionals who conduct a cost segregation study and determine that the following assets can be reclassified:
- Parking lot ($530,000),
- Landscaping and drainage ($53,000),
- Carpeting, blinds and wallpaper ($21,200),
- Cabinetry ($26,500),
- Flooring ($6,900), and
- Lighting ($5,300).
This study enables the dealer to reclassify and accelerate depreciation on $642,900 of its fixed assets. In 2015, he can deduct all the depreciation he could have taken since the building was acquired 10 years ago.
Auto retailers tend to achieve very substantial savings from cost segregation. That’s because dealerships own significant fixed assets—including retail display areas (such as the showroom and specialized mechanical systems in service and body)--that can be mistakenly classified as real property.
Regarding all of this accelerated depreciation, it’s important to keep in mind that cost segregation studies adjust only the timing of deductions. They don’t affect the total deductions taken over an asset’s life.
Accelerating Initial Savings and Capturing Retroactive Savings
Since 1996, dealers have been able to accelerate depreciation deductions from cost segregation studies when initially constructing real estate, as well as capture immediate retroactive savings for real estate that was previously acquired. Before then, taxpayers had to spread depreciation savings after a study over four years. Today, you can deduct the full amount as soon as your study is complete, thereby dramatically lowering your current tax bill. Of course, if you’re buying, building or renovating a dealership currently, this is also an ideal time to perform a study.
If you plan to sell the real estate soon, or at this time have real estate with a smaller cost, it sometimes may not be as desirable to incur the cost of the study. We can help you with this determination.
Also, the timing of a cost segregation study can provide additional opportunities as well. If you predict that 2016 will be more profitable than 2015 and that puts you into a higher tax bracket, it may be better to wait until 2016 to have the study performed.
Formal cost segregation studies are required to support accelerated deductions on your tax return in accordance with IRS guidelines. We work with experienced professionals who can analyze a dealership’s blueprints, engineering drawings and electrical plans to determine exactly which assets qualify as personal property.
The bottom line? The current tax savings from a formal cost segregation study may far exceed the cost of obtaining a properly prepared study and will prove its worth should the tax man come a-knocking. For many years, we have helped our clients work with superb cost segregation firms, and our clients have had very substantial tax savings as soon as possible.
Sooner Rather Than Later
Faster depreciation lowers taxable income today. Shorten up the standard useful life of property, if you’re eligible, and enjoy a tax savings sooner than expected.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.