Case Study: Cost Segregation Analysis for a Standalone Restaurant in New Orleans

Narrative

In 2023, the owners of a standalone restaurant in New Orleans undertook strategic tax planning to enhance their investment. The property consists of a single-story building encompassing approximately 6,272 square feet. Originally constructed in 1998, the restaurant was acquired and placed into service on August 23, 2023.

The building’s exterior features a combination of stucco over masonry and wood siding, providing a classic yet inviting appearance. Large aluminum and glass doors welcome guests into the establishment. The property includes concrete sidewalks and well-maintained landscaping that enhance its curb appeal.

Inside, the restaurant boasts modern amenities essential for efficient operation and customer satisfaction. The interior includes drywall partitions with metal studs, acoustic ceilings, and ceramic tile flooring in certain areas. The kitchen is well-equipped with multiple stainless-steel sinks, commercial grease exhaust hoods, a walk-in freezer measuring 8 feet by 12 feet, and an array of kitchen equipment outlets designed to accommodate specialized culinary appliances.

The restaurant is fitted with high-efficiency HVAC rooftop units, each with a capacity of 4 tons, ensuring optimal climate control throughout the establishment. Energy-efficient lighting fixtures, including recessed fluorescent lights and incandescent pendant fixtures, provide ample illumination while reducing energy costs. Safety features such as emergency battery lights and exit signs are strategically placed to ensure occupant safety.

Recognizing the potential for significant tax savings, the owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study on the property. This study aimed to identify and reclassify specific assets, enabling the acceleration of depreciation deductions and optimizing tax benefits. This case study outlines the cost segregation strategy employed and its substantial impact on the financial outlook of the property.

Objective

The primary objective of the cost segregation study was to identify and classify the restaurant's assets to optimize the owners' tax savings. By segregating and reallocating components into shorter depreciation life categories, ETS aimed to provide both immediate and long-term financial benefits through accelerated depreciation. This strategy was designed to improve cash flow and enhance the overall return on investment for the property owners.

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: $400,211.40 

Percentage of Total Depreciable Basis: 32.31%

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

• Electrical systems for specialized kitchen equipment
• Kitchen equipment (stainless steel sinks, grease traps, exhaust hoods)
• Point of sale systems and connections
• Decorative finishes (hardwood countertops, ceiling fans)
• Specialized plumbing connections (dedicated floor drains, utility sinks)
• Communication and security systems (telephone connections, security cameras)
• Specialized lighting fixtures (accent pendant fixtures, track lighting)

15-Year Class Life

Total Depreciation Allocation: $4,983.61 

Percentage of Total Depreciable Basis: 0.40%

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

• Land improvements (concrete sidewalks)
• Exterior site utilities (incoming service conduits, exterior lighting provisions)

39-Year Class Life

Total Depreciation Allocation: $833,504.99 

Percentage of Total Depreciable Basis: 67.29%

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

• Structural components (foundation, walls, roofing)
• Building systems (HVAC rooftop units, plumbing, electrical distribution)
• Permanent fixtures (doors, windows, drywall partitions)
• Interior finishes (acoustic ceilings, flooring)
• Essential restroom fixtures (water closets, lavatories, urinals)

Class Life Details:

Summary

The cost segregation study for this standalone restaurant demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in maximized tax savings and improved cash flow. Specifically, $400,211.40 (32.31% of the total depreciable basis) was reallocated to assets with a 5-year class life, and $4,983.61 (0.40%) to assets with a 15-year class life. This strategic reallocation significantly enhances the property's profitability and allows for more efficient capital management and future property upgrades.

The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments, particularly in the hospitality industry where specialized equipment and installations constitute a substantial portion of the asset base.