Narrative
In 2022, the owners of a newly constructed preschool in Woodbridge, VA, implemented strategic tax planning to optimize their educational facility investment. The property consists of a single one-story building encompassing 12,870 square feet. Originally constructed and placed in service on November 4, 2022, the preschool was designed to provide a modern, safe, and engaging environment for early childhood education.
The building's exterior features durable stucco over framing with stone veneer accents, complemented by energy-efficient windows and metal doors. The interior is thoughtfully designed with child-friendly amenities including vinyl composition tile (VCT) and carpet flooring, specialized kitchen equipment for meal preparation, multiple restroom facilities with dedicated fixtures, and comprehensive security camera systems. The property also includes extensive site improvements such as concrete sidewalks, asphalt paving, artificial turf play areas, and modular playground equipment designed for young children.
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 preschool's assets to optimize the owners' tax savings on their $1,787,222 investment (excluding land value of $415,500). 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:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $319,398.64
Percentage of Total Depreciable Basis: 17.87%
5-year class life assets identified in this study include:
- Specialized electrical systems (break room equipment outlets, kitchen equipment outlets, dedicated equipment GFI outlets)
- Kitchen equipment and fixtures (single bowl sink, 2-compartment sink, 3-compartment sink, floor drains)
- Security and communication systems (security cameras, security camera station, telephone connections, television connections)
- Interior finishes (VCT flooring, carpet flooring, vinyl plank flooring, FRP panels)
- Furniture and fixtures (base cabinets, upper cabinets, reception counter, laminate countertops)
- Specialized equipment (laundry washer, laundry dryer, point of sale connections)
15-Year Class Life
Total Depreciation Allocation: $386,078.42
Percentage of Total Depreciable Basis: 21.60%
15-year class life assets identified in this study include:
- Site improvements (concrete sidewalks, concrete paving, asphalt paving)
- Recreational facilities (playground equipment, artificial turf)
- Fencing and barriers (PVC/vinyl fence, wood fence 8ft, CMU screen wall)
- Site utilities and infrastructure (storm catch basins, site light bollards, monument sign)
- Parking improvements (concrete dumpster pad, parking space striping, bollards)
- Decorative elements (stone veneer)
39-Year Class Life
Total Depreciation Allocation: $1,081,744.94
Percentage of Total Depreciable Basis: 60.53%
39-year class life assets identified in this study include:
- Structural components (building slab on grade 4″, building footings, wood stud framing, wood roof construction)
- Building envelope (stucco over framing, asphalt shingle roof, windows, doors)
- Building systems (HVAC rooftop units, fire sprinkler system, electrical service, plumbing)
- Interior construction (drywall partitions, acoustic ceilings, perimeter drywall)
- Permanent fixtures (restroom water closets, wall lavatories, gas water heaters, electrical panels)
Class Life Details:
Summary
The cost segregation study for this preschool in Woodbridge, VA, demonstrates the substantial financial advantages of strategic tax planning on a $1,787,222 depreciable basis investment. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation through 2024, increasing accumulated depreciation from $97,380.69 (without cost segregation) to $764,418.29 (with cost segregation). The total increase of depreciation was $667,037.60, representing a 685% improvement in depreciation benefits over just two years. This approach not only enhanced the preschool's cash flow but also allowed for more efficient capital management and potential reinvestment in educational resources and facility improvements.
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