Narrative
In 2022, the owners of an auto services business in Nevada undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 15,000 square feet. Originally constructed in 2005, the auto services facility features 10 service bays designed to cater to a variety of vehicles.
The building's exterior showcases a blend of modern and industrial architectural elements, including a durable brick and metal exterior finish and large bay windows. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, tankless water heaters, and contemporary LED lighting fixtures. The property also includes a range of specialized equipment, including hydraulic lifts and diagnostic machines.
The owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study of the property. This study aimed to identify and reclassify specific assets, enabling the acceleration of depreciation and optimizing tax benefits. This case study outlines the cost segregation strategy employed and its significant impact on the financial outlook of the property.
Objective
The primary objective of the cost segregation study was to identify and classify the auto services business's assets to optimize the owners' tax savings. By breaking down and reallocating components into shorter depreciation life categories, ETS aimed to provide both immediate and long-term financial benefits through accelerated depreciation.
Methodology
ETS employed a detailed, engineering-based approach, which included:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $250,000 Percentage of Total Depreciable Basis: 20%
5-year class life assets identified in this study include:
- Specialized equipment (hydraulic lifts, diagnostic machines)
- Appliances (refrigerators, dishwashers, ice machines)
- Furniture and fixtures (cabinets, shelving, mirrors, counters)
- Interior finishes (flooring, ceiling fans, decorative wall treatments)
- Communication and security systems (telephone connections, key card readers, security cameras)
15-Year Class Life
Total Depreciation Allocation: $375,000 Percentage of Total Depreciable Basis: 30%
15-year class life assets identified in this study include:
- Land improvements (parking spaces, sidewalks, fences, landscaping)
- Site utilities and infrastructure (site lighting, signage, utility sinks)
39-Year Class Life
Total Depreciation Allocation: $625,000 Percentage of Total Depreciable Basis: 50%
39-year class life assets identified in this study include:
- Structural components (walls, doors, windows, roofing)
- Building systems (HVAC, plumbing, electrical distribution)
- Permanent fixtures (restroom fixtures, emergency lighting, signage)
- Interior construction (drywall partitions, flooring, ceilings)
Class Life Details:
Summary
The cost segregation study for this auto services business in Nevada demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in maximized tax savings and improved cashflow. This approach not only enhanced the auto services business's profitability but also allowed for more efficient capital management and future property upgrades. The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments.
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