Case Study: Cost Segregation Analysis for a Bank in Chehalis, WA

Narrative

n 2024, the owners of a bank building in Chehalis, Washington undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 1,950 square feet. Originally constructed in 1950, the bank features modern amenities designed to serve its customers.

The building's exterior showcases durable brick and stone veneer siding. The interior is well-appointed, featuring high-efficiency HVAC systems, a security vault, ATM connections, and contemporary lighting fixtures. The property also includes concrete sidewalks and parking areas.

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 bank building'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:

1. Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
2. Document Review: examining architectural plans, construction documents and accounting records
3. Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
4. Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)

Asset Allocation

5-Year Class Life

Total Depreciation Allocation: $267,285.92

Percentage of Total Depreciable Basis: 23.44%

5-year class life assets identified in this study include:

• Specialized electrical systems
• Security equipment
• Furniture and fixtures
• Decorative lighting
• ATM connections and equipment

15-Year Class Life

Total Depreciation Allocation: $13,147.05

Percentage of Total Depreciable Basis: 1.15%

15-year class life assets identified in this study include:

• Concrete sidewalks
• Landscaping
• Site lighting and signage

39-Year Class Life

Total Depreciation Allocation: $860,067.02

Percentage of Total Depreciable Basis: 75.41%

39-year class life assets identified in this study include:

• Building structure
• HVAC systems
• Plumbing and restroom fixtures
• Interior walls and doors
• Roofing

Class Life Details:

Summary

The cost segregation study for this bank building in Chehalis, Washington 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 bank'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 commercial real estate investments.