Case Study: Cost Segregation Analysis for a Retail Building in Suffolk, VA

Narrative

In 2024, the owners of a standalone retail building in Suffolk, Virginia, engaged in strategic tax planning to optimize their investment. The property consists of a single-story retail building encompassing approximately 14,600 square feet. Constructed in 2024, the building features modern retail space with supporting facilities.

The building's exterior showcases a blend of contemporary materials, including metal sandwich panels, brick veneer, and storefront glass systems. The interior includes well-appointed amenities such as modern electrical systems, plumbing fixtures, and a comprehensive fire protection system. The property also includes significant site improvements such as asphalt paving, concrete sidewalks, and professional landscaping.

Objective

The primary objective of the cost segregation study was to identify and reclassify building components into appropriate tax recovery periods to optimize depreciation benefits. The total depreciable basis of $4,604,050 was analyzed to maximize tax advantages through accelerated depreciation schedules.

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: $819,870.06 Percentage: 17.81%

Key components included:

• Point of sale and computer connections
• Security systems
• Specialized electrical equipment
• Furniture and fixtures
• Flooring and millwork

15-Year Class Life

Total Allocation: $1,082,828.53 Percentage: 23.52%

Key components included:

• Site improvements
• Paving and curbing
• Exterior lighting
• Fencing and gates
• Site utilities

39-Year Class Life

Total Allocation: $2,701,351.41 Percentage: 58.67%

Key components included:

• Building structure
• Basic electrical systems
• Plumbing systems
• HVAC
• Fire protection systems

Class Life Details:

Summary

The cost segregation study resulted in significant tax benefits through the reclassification of assets into shorter recovery periods. The analysis identified that 41.33% of the total depreciable basis could be depreciated over accelerated 5 and 15-year periods, compared to the standard 39-year depreciation schedule. This reclassification resulted in a first-year accumulated depreciation benefit of $1,289,472.57, representing a substantial increase over the non-segregated depreciation amount of $103,295.99.