Auto Dealerships Can Increase Cash Flow with Cost Segregation

April 2019 | Article

By Travis Mlodzik

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 facilities.

On average, auto dealerships analyzed from a cost segregation perspective see over 15% of the basis reclassified to a five- or seven-year recovery period and an additional 10-15% to a 15-year recovery period. By accelerating 25-30% of the depreciation deductions along with applying bonus depreciation and/or Section 179 expense to qualifying property, savings can be substantial.

It’s important to note that the analysis of your facilities does not need to be done in the year placed in service. Planning opportunities exist to perform an analysis and take advantage of the accelerated deductions in the year of your choosing without amending returns by filing an accounting method change, Form 3115.

The Right Time
With the implementation of the Tax Cuts & Jobs Act of 2017, taxpayers now enjoy 100% bonus depreciation on assets with a recovery period of 20 years or less through tax years ending Dec. 31, 2022. In addition to the bonus rate increasing to 100%, the Tax Cuts & Jobs Act also removed the “original use” requirement from the definition of bonus eligible property, so assets acquired after Sept. 27, 2017, qualify for bonus depreciation if certain requirements are met.

Floor Plan Financing & Bonus Depreciation Interplay
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. With that said, it is our belief, based on interpretations of the regulations that 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.

It is anticipated that the final regulations governing floor plan financing indebtedness will be released in June 2019. The final bonus depreciation regulations are anticipated to be released towards the end of summer or early fall 2019 and should be accompanied by procedural and industry-specific guidance.

A Good Fit for Dealerships
There are several reasons dealerships are great candidates for a cost segregation study.

  • Image Enhancements and Renovations
    In many instances, decorative facades and other signage items are installed as part of the required image enhancements. 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 recovery period. Renovations of facilities are typically more lucrative from a cost segregation perspective, as the majority of the activity relates to reconfiguration or décor modifications as opposed to structural enhancements. In addition to the installation of these assets, partial dispositions might be available for assets removed during the renovation.
  • 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).

Get a Free Assessment
If you own or plan to acquire, renovate or construct an auto dealership and are looking for additional tax deductions, give your Eide Bailly tax advisor a call. We would be happy to prepare a free of charge, no obligation proposal of potential benefits and fees for maximizing your return on your buildings through a cost segregation analysis.

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