Case Study: Cost Segregation Analysis for a Restaurant in Rexburg, Idaho

Narrative

In 2024, the owners of a standalone restaurant in Rexburg, Idaho, undertook strategic tax planning to enhance their investment. The property consists of a single-story building encompassing 3,813 square feet. Originally constructed in 1978, the restaurant features modern kitchen facilities and dining areas designed to provide an optimal customer experience.

The building's exterior showcases a blend of functional and aesthetic elements, including fiber cement siding, brick veneer, and large commercial windows. The interior is well-appointed with commercial kitchen equipment, including walk-in coolers and freezers, stainless steel fixtures, and modern HVAC systems. The property also includes paved parking areas, landscaping, and exterior signage.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories, enabling accelerated depreciation 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: $224,159.44 Percentage of Total Depreciable Basis: 31.93%

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

• Walk-in coolers and freezers
• Kitchen equipment and fixtures
• Specialized electrical systems
• Point of sale systems
• Custom cabinetry and countertops

15-Year Class Life

Total Depreciation Allocation: $103,500.33 Percentage of Total Depreciable Basis: 14.74%

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

• Paved parking areas
• Exterior signage
• Landscaping
• Site improvements

39-Year Class Life

Total Depreciation Allocation: $374,340.23 Percentage of Total Depreciable Basis: 53.32%

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

• Building structure
• Roof system
• Basic electrical
• Plumbing systems
• HVAC

Class Life Details:

Summary

The cost segregation study resulted in significant tax savings through accelerated depreciation. The first-year accumulated depreciation increased from $8,250 to $220,997.92, providing an additional $212,747.92 in depreciation deductions. This strategic reclassification of assets allows for improved cash flow and tax efficiency for the property owner.