Case Study: Cost Segregation Analysis for a Fast Food Restaurant in Augusta, SC

Narrative

In 2024, the owners of a fast food restaurant in Augusta, South Carolina undertook strategic tax planning to enhance their investment. The property consists of a single 1-story building originally constructed in 1976.

The building's exterior showcases a blend of modern and classic architectural elements, including a durable brick veneer and aluminum frame storefront systems with clear plate glass. 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 drive-thru window and canopy.

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 fast food restaurant'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: $708,969.57 

Percentage of Total Depreciable Basis: 33.46%

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

• Kitchen equipment (exhaust hoods, sinks, ice machines)
• Signage (interior illuminated, building mounted)
• Security systems (cameras, recorders)
• Decorative lighting (track lights, pendant fixtures)
• Dedicated electrical systems and outlets

15-Year Class Life

Total Depreciation Allocation: $441,270.63 

Percentage of Total Depreciable Basis: 20.83%

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

• Site improvements (asphalt paving, concrete curbs, fencing)
• Landscaping and irrigation systems
• Exterior lighting (pole lights, floodlights)

39-Year Class Life

Total Depreciation Allocation: $968,541.20 

Percentage of Total Depreciable Basis: 45.71%

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

• Building structure (walls, roof, doors, windows)
• HVAC systems and ductwork
• Plumbing systems and fixtures
• Electrical distribution systems
• Interior finishes (drywall, flooring, ceilings)

Class Life Details:

Summary

The cost segregation study for this fast food restaurant in Augusta, South Carolina 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 restaurant'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.