Case Study: Cost Segregation Analysis for a Standalone Restaurant in Sunnyvale, California

Narrative

In 2024, the owners of a standalone restaurant in Sunnyvale, California, undertook strategic tax planning to enhance their investment. The property consists of a single one-story building encompassing 4,639 square feet. Originally constructed in 1975, the restaurant has been well-maintained and features both dining and kitchen facilities.

The building’s exterior showcases a blend of traditional and modern elements, including CMU walls with stucco finish and aluminum/glass doors. The interior is well-appointed with commercial kitchen equipment, dining area finishes, and modern mechanical systems including HVAC rooftop units and comprehensive kitchen ventilation systems. The property also includes extensive site improvements such as parking areas, landscaping, and exterior lighting.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories to accelerate depreciation deductions and optimize tax benefits. The total depreciable basis of $3,450,000 was analyzed to identify assets qualifying for 5-year, 15-year, and 39-year depreciation periods.

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: $1,028,174.21 

Percentage of Total Basis: 29.8%

Key components included:

• Commercial kitchen equipment
• Walk-in coolers and freezers
• Specialized electrical systems
• Security and communication systems
• Dining room furniture and fixtures

15-Year Class Life

Total Allocation: $526,566.58 

Percentage of Total Basis: 15.26%

Key components included:

• Site improvements
• Parking areas
• Exterior lighting
• Landscaping
• Site utilities

39-Year Class Life

Total Allocation: $1,895,259.18 

Percentage of Total Basis: 54.94%

Key components included:

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

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation. The analysis resulted in reclassifying approximately 45% of the total depreciable basis into shorter recovery periods. The first-year accumulated depreciation increased from $40,544.87 to $1,047,903.09, providing an additional benefit of $1,007,358.22 in accelerated depreciation deductions.