Cost Segregation Studies for Auto Dealerships
Cost segregation is a strategic approach that auto dealership owners can use to maximize advantages and improve their bottom line. While completing a cost segregation study for dealers who own property can be a profitable tax strategy, dealerships can also generate cash flow and accelerate tax deductions through a cost segregation study. From the specialty equipment in vehicle services, to renovations, required enhancements and regularly acquiring or upgrading stores, accelerated deductions may be concealed within auto dealership facilities.
What is a Cost Segregation Study?
The goal of a cost segregation study is to identify the dealership’s real property related costs that depreciate over 39 or 27.5 years and reclassify the recovery period to five, seven or 15 years. This is completed by analyzing the components classified as part of a building through a Cost Segregation Audit Technique Guide provided by the Internal Revenue Service (IRS). Cost segregation studies can also classify qualified improvement property (QIP), which can qualify for bonus depreciation deductions and Section 179 depreciation deductions. To qualify for bonus depreciation, the property must: take longer than one year to build and be over $1 million or take two years to build. Bonus depreciation began phasing out in 2022 by 20% each year and will continue until the percentage falls to 0% in 2027.
Why Are Cost Segregations Studies Ideal for Auto Dealerships?
Auto dealerships have several assets that make them an ideal candidate for a cost segregation study. The following assets identify as real property from the IRS and will be analyzed in the study to see if they could potentially be reclassified to a shorter recovery period.
| Awnings and canopies | Bollards and guardrails bollards | Cabinetry |
| Computers | Concrete foundations and footings | Data handline equipment |
| Interior and exterior doors | Electrical system | Elevators and escalators |
| Energy management systems | Exit signs | Fire protection equipment |
| Floors, floor coverings, floor pits and trenches work | Heating, ventilating and air conditioning (HVAC) | Inventory display |
| Interior and exterior light fixtures | Loading docks | Machinery and equipment |
| Milwork | Office furniture | Parking lots, parking structures and light poles |
| Plumbing | Point of Sale (POS) system | Restroom accessories |
| Retail accessories | Roof | Security systems |
| Sidewalks and curbs | Site preparation, site utilities and site work | Sound systems |
| Trash enclosures | Exterior and interior walls | Windows and window treatments |
What are the Benefits of a Cost Segregation Study?
Cost segregation studies offer several benefits for auto dealerships such as accelerated depreciation, tax savings and improved cash flow. Dealerships that are newly acquired generally go under major renovations. It’s important that these newly acquired building assets begin a cost segregation study immediately after purchase or after construction. Conducting a cost segregation study will allow the buyer to simultaneously identify accelerated property and property with longer depreciable lives. Once this is identified, partial dispositions can be used to recognize deductions of demolished or disposed property from renovations. Partial dispositions can only be identified in the year they occur, and demolition costs may be expensed.
Take Advantage of Cost Segregation with Brown Plus
Whether an auto dealership has been newly constructed, purchased or renovated, the components of the building should always be classified through a cost segregation study into shorter recovery periods for computing depreciation. Contact a Brown Plus tax advisor if you have any questions on cost segregation studies!