Case Study: Cost Segregation Analysis for a Retail Building in Rapid City, South Dakota

Narrative

In 2023, the owners of a standalone retail building in Rapid City, South Dakota, sought to optimize their tax position through strategic cost segregation. The property consists of a single-story building encompassing approximately 6,300 square feet. Originally constructed in 1996, the retail facility features modern architectural elements and comprehensive building systems.

The building's exterior showcases a blend of architectural finishes, including an exterior insulated finish system (EIFS) and storefront glazing systems. The interior includes various specialized systems such as electrical distribution, HVAC, plumbing, and contemporary lighting fixtures. The property also includes significant site improvements such as asphalt paving, concrete sidewalks, and professional landscaping.

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.

Objective

The primary objective of the cost segregation study was to identify and classify the retail 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: $133,464.90

Percentage of Total Depreciable Basis: 21.61%

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

• Dedicated electrical systems
• Point of sale connections
• Computer and telephone systems
• Cabinetry and countertops
• Specialized fixtures and equipment

15-Year Class Life

Total Depreciation Allocation: $94,022.63

Percentage of Total Depreciable Basis: 15.22%

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

• Paving and parking areas
• Site improvements
• Exterior lighting
• Landscaping
• Concrete curbs and sidewalks

39-Year Class Life

Total Depreciation Allocation: $390,094.52

Percentage of Total Depreciable Basis: 63.16%

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

• Building structure and envelope
• Basic electrical systems
• HVAC systems
• Plumbing systems
• Fire protection systems

Class Life Details:

Summary

The cost segregation study for this retail building in Rapid City, SD demonstrates significant financial advantages. The analysis identified $227,487.53 (36.83%) of the total depreciable basis of $617,582.05 that could be reclassified to shorter recovery periods. This reclassification resulted in substantial first-year accumulated depreciation of $212,350.36, compared to only $21,773.73 without cost segregation, providing an accelerated depreciation benefit of $190,576.63.