As a result of significant renovations, auto dealers are enjoying increased showroom traffic, increased sales, and a welcome increase in earnings. But this drive higher tax burdens. An engineering based cost segregation study, which applied tax compliant depreciation timelines to certain nonstructural components of the renovations may decrease tax burdens. Its worth a look at the benefits of these programs.
Many auto dealerships in the US have implemented significant renovations as the industry continues to transform and the manufacturers rebrand themselves and recover from their financial woes of the past. There have been noticeable results; manufacturers and dealers are seeing increased showroom traffic, which is resulting in a recovery in sales.
With increased sales, comes an increase in earnings, which is a good thing. However, higher profits typically drive higher taxes. To combat this, a number of dealerships are employing engineering based cost segregation studies to more quickly capitalize the tax benefit associated with these renovations. Moreover, dealerships may be able to take advantage of bonus depreciation.
Engineering based cost recovery studies applies tax compliant depreciation timelines to certain nonstructural components of the renovations. For example, carpeting, which it is often depreciated over 39 years as if it was part of the structural item, could be depreciated over five years, which is more in line with its expected life. Many other nonstructural building components can be depreciated in five, seven, and 15 years versus the more standard 39 years.
Furthermore, the tax benefits of properly depreciating current renovations can apply to the entire existing facility, including past renovations. Accelerated depreciation can result in increased cash flows in the early years after purchase, construction, or significant renovation of the property. Indeed, our experience shows us that, in some cases, it is possiable to document as much as $200,000 of accelerated depreciation per $1 million of building. Assuming 35% tax rate, this will equate to a $70,000 improvement to the bottom line.
Moreover, dealerships may be able to benefit from bonus depreciation, which allows a business to make an additional deduction of 50% of the cost of qualifying property in the year in which it is put into service. According to the IRS, this special "bonus depreciation" allowance is available to all businesses and applies to most types of tangible personal property and computer software acquired and placed in service in a particular year. It allows taxpayers to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available.
In summary, cost segregation analysis, which dates back to 1959, may effectively lower a company's tax burden. Any dealership that has purchased, constructed, or renovated a property should look at the cost benefits of this type of study.
About the author – Steve Picarillo is a financial executive and consultant that focus on helping individuals and businesses achieve their business goals. Creative Advisory Group, Inc. is a consulting firm that, in addition to other services, offers cost saving solutions to small and midsize companies. For more information on cost-saving solution programs please visit www.creativeadvisorygroup.com or email steve@creativeadvisorygroup.com.
Company Name: Creative Advisory Group, Inc.Contact Person: Steve Picarillo
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