Could you use a tax strategy that can save you significant tax dollars? If so — and who doesn’t want to save tax? — consider looking into a cost segregation study on the real estate your dealership owns. It could save you a bundle.
You may be eligible to retroactively save taxes through accelerated depreciation if, in the last decade or so, you purchased real estate, built a new showroom, renovated your facilities or expanded your property.
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. Chances are 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 potentially can be carved out and depreciated more quickly than standard real estate.
For example, suppose a dealer spent $6 million on a new showroom in 2005. In 2015, his CPA conducts a cost segregation study and determines 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)
- 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. 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.
Auto retailers tend to achieve some of the highest savings from cost segregation studies compared to other businesses. That’s because dealerships own significant fixed assets — including retail display areas (such as the showroom and specialized mechanical systems) that can be mistakenly classified as real property.
But 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.
Capturing retroactive savings
Since 1996, dealers have been able to capture immediate retroactive savings from cost segregation studies. Before then, taxpayers had to spread depreciation savings 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 also is an ideal time to perform a study.
Formal cost segregation studies are required to support accelerated deductions on your tax return in accordance with IRS guidelines. An experienced professional 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 knocking.
Sooner rather than later
Faster depreciation lowers taxable income today. Shorten up the standard useful life of property, if you’re eligible, and enjoy tax savings sooner rather than later.