By Julie Helms
December 12, 2017
The auto dealership industry is prime for accelerating tax deductions and generating cash flow through cost segregation studies. With the specialty equipment in service areas and the required image upgrades, benefits abound.
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 the majority of the cost incurred relates to reconfiguration or decor modifications, as opposed to structural enhancements.
The recently-established Qualified Improvement Property definition is another item that may allow for additional bonus depreciation deductions on the interior portion of the renovations. Depending on the documentation available—and the type of support requested—a simple invoice review may be more appropriate than a full cost segregation study, resulting in substantial benefit at a lower price.
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.
Benefit to Dealerships
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, and 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.
It's important to note that the analysis of a facility does not need to be done in the year the facility is placed in service. It is possible to perform an analysis, and take advantage of the accelerated deductions, in a chosen year without amending returns through filing an accounting method change on Form 3115.
If rates drop as a result of tax reform, what was once just a timing item through accelerating depreciation deductions may result in a permanent tax savings by completing the analysis and taking advantage of the additional deductions when rates are high.
How One Company Saved
Recently, we completed a cost segregation benefit analysis 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. The analysis focused on the client's facilities and included buildings placed in service from 2011 through 2016.
If you own an auto dealership—or a business that also requires periodic re-imaging programs—and are looking for additional tax deductions, contact your Eide Bailly tax professional about a free, no-obligation proposal of potential cost segregation benefits.