Case Study: Cost Segregation Analysis for a Preschool in Richmond, TX

Narrative

In 2017, the owners of a preschool facility in Richmond, Texas, undertook strategic tax planning to enhance their investment. The property consists of a single one-story building encompassing 10,000 square feet. Originally constructed in 2017, the preschool features modern educational facilities designed to cater to early childhood education.

The building's construction includes both structural and specialized components to support its educational mission. The facility features dedicated classroom spaces, reception areas, break rooms, kitchen facilities, and various specialized areas for early childhood development. The property also includes significant site improvements such as playground equipment, safety features, and appropriate outdoor spaces for children's activities.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories, thereby accelerating depreciation deductions and optimizing tax benefits for the property owner.

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:  $597,088.84

 Percentage of Total Depreciable Basis: 23.24%

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

• Dedicated electrical systems
• Specialized classroom equipment
• Security systems
• Communication systems
• Cabinetry and built-in furniture
• Specialized plumbing fixtures

15-Year Class Life

Total Depreciation Allocation: $484,761.10 Percentage of Total Depreciable Basis: 18.87%

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

• Site improvements
• Paving and curbing
• Playground equipment
• Landscaping
• Outdoor lighting
• Fencing and security features

39-Year Class Life

Total Depreciation Allocation: $1,486,845.06 Percentage of Total Depreciable Basis: 57.88%

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

• Basic building structure
• Standard electrical
• Standard plumbing
• HVAC systems
• Roof system
• Interior partitions

Class Life Details:

Summary

The cost segregation study resulted in significant tax savings by identifying $1,081,849.94 (42.11%) of the total property cost that could be depreciated over 5 and 15 years instead of the standard 39-year period. This reclassification resulted in accumulated depreciation of $1,356,662.10 through 2024, compared to $474,769.46 under standard depreciation – an increase of $881,892.64 in accumulated depreciation.