Case Study: Cost Segregation Analysis for an Auto Service Building in Bonner Springs, KS

Narrative

In 2022, the owners of an auto service building in Bonner Springs, KS, undertook strategic tax planning to enhance their investment. The property consists of a single 1-story building encompassing 17,450 square feet. Originally constructed in 1993, the auto service building features 1 tenant space designed to cater to automotive repair and maintenance needs.

The building's exterior showcases durable metal sandwich panels. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, a fire sprinkler system, and contemporary lighting fixtures. The property also includes a mezzanine level constructed with wood framing.

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 auto service building's assets to optimize the owners' tax savings. 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:

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: $425,947.42 

Percentage of Total Depreciable Basis: 12.5%

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

• Dedicated equipment outlets and panels
• Specialized plumbing for auto service equipment
• Breakroom appliances and cabinetry
• Computer, telephone and television connections
• Vinyl baseboard

15-Year Class Life

Total Depreciation Allocation: $1,167,222.74 

Percentage of Total Depreciable Basis: 34.25%

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

• Site improvements such as asphalt paving, concrete, fencing, and lighting
• Trench drains
• Landscaping and irrigation system

39-Year Class Life

Total Depreciation Allocation: $1,815,276.83 

Percentage of Total Depreciable Basis: 53.26%

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

• Building structure and exterior walls
• Roof system
• Fire protection sprinkler system
• HVAC systems
• Electrical service and distribution
• Plumbing and restroom fixtures
• Wood mezzanine structure

Class Life Details:

Summary

The cost segregation study for this auto service building in Bonner Springs, KS 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 cashflow. This approach not only enhanced the building's profitability but also allowed 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.