Case Study: Cost Segregation Analysis for a Preschool in San Antonio, Texas

Narrative

In January 2023, the owners of a preschool facility in San Antonio, Texas, sought to optimize their tax position through strategic cost segregation planning. The property consists of a single-story building encompassing approximately 6,952 square feet. Originally constructed in 2004, the preschool features modern educational facilities and amenities designed to provide a safe and engaging learning environment for young children.

The building includes specialized areas such as classrooms, a kitchen facility, restrooms, administrative spaces, and outdoor recreational areas. Notable features include a modern playground, security systems, specialized electrical and plumbing systems, and dedicated HVAC infrastructure. The property also includes significant land improvements such as parking areas, sidewalks, fencing, and landscaping.

Objective

The primary objective of the cost segregation study was to identify and classify the preschool'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 Allocation: $194,605.50 Percentage: 23.59%

Key components included:

• Electrical systems and specialized wiring
• Kitchen equipment and plumbing
• Security and communication systems
• Cabinetry and built-in furniture
• Specialized flooring and finishes

15-Year Class Life

Total Allocation: $179,348.74 Percentage: 21.74%

Key components included:

• Site improvements
• Playground equipment and surfaces
• Concrete sidewalks and paving
• Fencing and security features
• Landscaping and outdoor amenities

39-Year Class Life

Total Allocation: $451,045.77 Percentage: 54.67%

Key components included:

• Building shell and structural elements
• Standard electrical and plumbing systems
• HVAC infrastructure
• Interior walls and ceilings
• Standard doors and windows

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation, with approximately 45.33% of the total depreciable basis qualifying for shorter recovery periods. This resulted in a first-year accumulated depreciation of $319,824.48, compared to only $20,272.44 under standard depreciation – a difference of $299,552.04 in additional first-year depreciation.