How Auto Dealers Can Benefit from Cost Segregation Studies

February 6, 2020 | Article

The auto dealership industry is prime for accelerating tax deductions and generating cash flow through cost segregation studies. From specialty equipment in service areas to required image enhancements and renovations, accelerated deductions are hidden within your auto dealership facility.

On average, auto dealerships utilizing a cost segregation study will find that 10 to 15 percent of the basis is reclassified to a 5- or 7-year recovery period. An additional 10 to 15 percent is reclassified to a 15-year recovery period, as opposed to the longer recovery periods when no cost segregation study is utilized. By accelerating 25 to 30 percent of the depreciation deductions—along with applying bonus depreciation and/or Section 179 expenses to qualifying property, current tax, and resulting cash—savings can be substantial.

What is a cost segregation study?
A cost segregation study examines components classified as part of a building through an IRS approval process. This helps taxpayers accelerate depreciation deductions, reducing taxes paid and resulting in increased cash flow.

Unsure if a cost segregation study will apply to you?

Cost segregation studies are an ideal fit for dealerships
There are several reasons why dealerships are great candidates for cost segregation studies.

Image Enhancements
In many instances, decorative facades and other signage items are installed as part of a brand image enhancement program. These items, depending on how they're installed, could potentially be reclassified to a shorter recovery period and significantly increase the amount of basis accelerated to a shorter depreciation period. Facility renovations are typically more beneficial from a cost segregation perspective since most of the cost incurred relates to reconfiguration or decor modifications, as opposed to structural enhancements.

Retail Motor Fuels Outlet Classification
Similar to auto dealerships, gas stations and other retail motor fuel distributors and sellers may also qualify for a 15-year recovery period. This allows entire structures to receive the beneficial 15-year recovery period as opposed to the standard 39-year timeframe.

Qualified Improvement Property
Another aspect of renovations where benefit may be lurking is within qualified improvement property. Qualified improvement property is any interior non-structural improvement made to a previously placed in service non-residential building. In addition to the interior improvements, the Tax Cuts & Jobs Act also added roofs, HVAC, security systems, and fire suppression systems to the definition of qualified improvement property.

Currently, qualified improvement property has a recovery period of 39 years, but the Tax Cuts & Jobs Act intended to assign a 15-year recovery period to qualified improvement property. Barring a technical correction of the tax law, this will remain the case. However, there is still benefit to qualified improvement property, as the Tax Cuts & Jobs Act did change the Section 179 deduction to include qualified improvement property (subject to the limitations).

Floor Plan Financing & Bonus Depreciation
Within the dealership industry, some properties may be disqualified from bonus depreciation because of floor plan financing indebtedness. If the property has taken the floor plan financing indebtedness into account under the new rules for limiting the business interest deduction to 30%, then the property would not qualify for bonus depreciation. However, a real estate entity and operating entity should be treated as separate properties. In this case, if the operating entity is carrying the floor plan financing indebtedness, we believe the real estate entity should still be eligible to claim bonus depreciation.

Cost segregation’s impact on auto dealerships
A cost segregation benefit analysis was recently conducted for a group of eight auto dealerships. The parent company had acquired buildings, new construction and renovation projects which resulted in a first-year savings of over $2M once the study was complete.

Cost Segregation as a Tax-Saving Opportunity for Your Auto Dealership
Cost segregation can be a very beneficial tax planning tool for auto dealerships. If you own or plan to acquire, renovate or construct an auto dealership, cost segregation could be a beneficial tax planning tool. IRS rules allow taxpayers to apply a cost segregation study any time after the building is purchased, renovated, or constructed, which provides a unique opportunity to plan which tax year depreciation deductions are realized.

Discover how cost segregation can help you increase cash flow and reduce tax liability.

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Cost Segregation Fixed Asset Services Tax