Franchisors like hotels, restaurants, automotive services, retail stores, and more could be missing major tax benefits if they are not taking advantage of a cost segregation study. In addition to franchises, any business involving real estate holdings can also take advantage of the benefits resulting from a cost segregation study. A cost segregation study performed by Engineered Tax Services can enable commercial property owners to defer thousands, or even hundreds of thousands of dollars in income taxes.
Many franchisors, who create property themselves, are learning that they can increase profitability and even create another location, or multiple locations, simply by having a cost segregation study done on their property or properties. They are able to see the benefits of the study on their tax returns, and these benefits allow them to invest in equipment, improvements, hiring new employees, purchasing new property, and more. Here are some tips to understand if your franchise, property, or business is eligible for a cost segregation study.
What are the Qualifiers?
The first identifier to qualify for a cost segregation study is the fact that the cost basis of the property will be placed on the books for depreciation. Any property, which is being or will be depreciated, qualifies for a cost segregation study. Whether this is a large corporation franchise business – owning multiple facilities or properties, or personal business – such as a rental home, they can all take advantage of the benefits derived from a cost segregation study
Common Misconception and Bonus Depreciation
Cost segregation is a benefit that is based on the amount of tax basis invested in real estate property. A common misconception is that real estate properties under $1M have a smaller tax basis and would not benefit from cost segregation, due to the belief that the fees for the study would outweigh the benefit. However, that is not always the case. Properties ranging from $500K and under to $50M or more have benefited from cost segregation. This is because the smaller properties do not only benefit from accelerated depreciation, but also from bonus depreciation, repairs and maintenance expenditures, and partial asset dispositions. These studies not only serve the current year tax filings, but also set the path for accuracy on the depreciation schedule and how to properly handle assets in the future.
The same circumstances apply even in a small tenant improvement with bonus depreciation and new assets. There is quite a bit that can be written off to validate the benefit from the study. This is especially true if there is demolition work of old assets, which will result in partial asset dispositions, as well as potential repairs or routine maintenance expenditures.
Common Misconception and Land Improvements
Another misconception surrounding properties that do not have a lot of personal property in them, with very little interior build out such as industrial warehouses, will not benefit from a cost segregation study. However, there is still a benefit to have a study done because those properties generally have a lot of land improvements that qualify for accelerated depreciation. They may also have certain portions of electrical, mechanical, and plumbing that can also qualify. This kind of study can pay greatly in the first year, but the ability to identify those dispositions, repairs, and maintenance, can be an added value. Also, the minimizing of the recapture through the proper retirement of assets is also a valuable benefit.
Recapture and Cost Segregation
Upon the sale of a business property, personal property, and land improvements identified through cost segregation are disposed of at net tax book value. Subsequently, there are neither gains nor losses associated with the disposal of these corresponding assets. All resulting gains on the sale of the associated structure and land will be will taxed at a preferential capital rate.
Length of Ownership and Minimizing Recapture
If a property is purchased with the intention to flip it or own it for a short period of time (less than a year), a cost segregation study may not be meaningful. However, cost segregation experts at Engineered Tax Services can access your situation on a case by case basis.
Recently Sold Properties
If a property or franchise has already been sold, there is still a window of opportunity to capture a benefit. A recently sold property may still be a good candidate for cost segregation as long as you sold the building and have not filed the current year’s tax return. If this is the case, there is an opportunity to do a cost segregation study and begin maximizing tax deductions at ordinary tax rates.
For a consultation, please contact Engineered Tax Services at (800) 236-6519.