Cost Segregation – GMG Savings

Cost Segregation for Automotive Dealerships after the TCJA Changes

The automotive dealership industry is unique because each dealership is in a constant state of construction, remodeling, expanding or purchasing existing properties. The only way to ensure this constant state of flux doesn’t bankrupt a dealership is to review these assets to determine the shortest recovery life possible, expensing in the current tax year.

By taking advantage of all eligible tax deductions it opens up cash flow for your dealership that would have otherwise been lost. A fixed asset review can easily be done by having a cost segregation study performed.

The Tax Cut and Jobs Act or TCJA was the most sweeping tax code change in 30 years and has significant impact on the automotive dealership industry along with the tax incentives that allow you to obtain the benefit from a cost segregation study.

There are three significant aspects of the TCJA that when combined make for an interesting ride for auto dealerships looking to obtain their rightful tax deductions. Let’s take a look.

Section 179
The TCJA expanded section 179 from a $510,000 limit to $1 million and now includes improvements it did not previously such as: roofing, fire protection and alarm systems. All of which are large expenses for an auto dealership in the midst of new construction or remodeling.

Floor Plan Interest

The TCJA preserved the 100% deduction of floor plan interest. If you are eligible for floor plan interest you must claim it, it is not optional. However, there is a catch. If you are eligible you cannot claim bonus depreciation. This doesn’t mean an automatic sigh and slump in your chair, not all dealerships qualify for floor plan interest and bonus depreciation is not the only aspect of a cost segregation that benefits auto dealerships.

Bonus Depreciation
Bonus Depreciation was highly expanded with the TCJA. It was increased from 50% to 100% and applies to both new and used properties acquired through December 31, 2022. This is an unheard of expansion of bonus depreciation and has such a significant impact that the National Automobile Dealers Association (NADA) is currently working through hearings with the IRS demanding the 100% bonus depreciation because the TCJA eliminated the like-kind exchange tax benefit for all but real property. We expect to see continued discussion on this topic over the next several months.

Although some automotive dealerships won’t be able to benefit from the expansion of bonus depreciation because of the changes with the TCJA it does not eliminate the enormous financial impact that a cost segregation study has for an auto dealership.

To find out more please contact speak to your Advisor today!

Washington State Funeral Directors Association Enlists GMG to Identify and Procure Specialized Tax Incentives for Members

Arkansas Funeral Directors Association Enlists GMG to Identify and Procure Specialized Tax Incentives for Members

Do you have a ‘Tax Preparer’ or a CPA?

Depending on your answer, you could be getting bad advice which puts more money in the IRS’s coffers (and leaves less in your pocket).

Below is the crux of a typical tax preparer’s opinion regarding Engineering Based Cost Segregation Studies which an experienced CPA would say has kept many commercial property owners from implementing this highly beneficial tax strategy which is effectively encouraged by the IRS.

Here is a typical ‘tax preparer’ statement to commercial property owners:
“You are not getting additional depreciation, you are accelerating depreciation by allocating cost to shorter life. I advise against such a strategy as there can be future tax implications and also there is upfront cost involved.”

For frame of reference, here is the IRS’ view (from www.irs.gov) on cost segregation:
“Buildings and structural components have substantially longer depreciable lives than personal property. Therefore, it is desirable for taxpayers to maximize personal property costs in order to accelerate depreciation deductions and, hence, reduce tax liability.” (source)

Here’s how many experienced CPAs would look at this matter:

The above point of view isn’t considering the bigger picture. For instance, only looking at the (potentially) negative capital gains tax implications associated with cost segregation by itself is ‘missing the forest for the trees’:

It is not necessarily true this would be a ‘negative’ as it would depend on the ultimate sale price versus the depreciable cost basis; if the sale price is equal to or less than the depreciable cost basis then the capital gains issue is, well, a non-issue.
There is no consideration given to the positive effect on the income tax picture due to cost segregation; this positive effect needs to be weighed against the potentially negative capital gains effect.
In general, property owners will benefit from cost segregation if they hold the building for at least 18 months. One reason for this dynamic is that the capital gains tax, even at the 25% ‘re-cap’ rate, is much lower than the typical 35% to 39.6% income tax rate.
There is an assumption that the property owner is absolutely giving up all future depreciation benefits in exchange for taking those benefits now. Well, if the owner never replaces carpeting, wiring, plumbing and other such non-structural components, then, ‘yes’, that would be the case. But the reality is that these components will ultimately be replaced (which is the basis for the relatively shorter/accelerated tax-compliant depreciation time-lines for such items). The associated replacement costs can be depreciated.

So, in fact, the depreciation isn’t lost in reality. Plus, only about 20% of the building can be ‘accelerated’…the remainder stays in 39-year S/L.

In effect, this is a time-value-of-money/opportunity cost ‘play’. So an owner’s capitalization rate needs to be considered; a critical mass of money in the hands of a good businessperson NOW could feasibly produce a 10% or greater return. An owner’s ability to convert that ‘now cash’ (i.e., cash that becomes available due to cost segregation’s resulting reduction in current income tax) into more cash could easily dwarf the down-the-road bit-by-bit depreciation cost deductions which the owner MAY be passing on.
The “upfront costs” for conducting an Engineering Based Cost Segregation Study are barely worthy of factoring into the benefits equation; first, the Study is a business expense and effectively comes at a 35% (+/-) ‘discount’, and secondly, the Study cost can often be less than 10% of the tax benefit (even without the ‘discount’). Most business-minded people would find a project with a minimum 10:1 benefit-to-cost ratio to be worthy of pursuit.

So, do you have a ‘Tax Preparer’ or a CPA? The best way to find out is to ask him or her how they perceive the value of an Engineering Based Cost Segregation Study for a commercial property owner.

To stream a 3-minute video regarding this topic, please click here.

For additional information contact us.

Specialized Tax Incentives for the Funeral Home Industry

The IRS Is Trying To Help Funeral Homes Pay Them Less! (Don’t believe it? – read on)

This statement is directly from www.irs.gov, “Buildings and structural components have substantially longer depreciable lives than personal property. Therefore, it is desirable for taxpayers to maximize personal property costs in order to accelerate depreciation deductions and, hence, reduce tax liability.”

This largely overlooked tax strategy often reaps over $100,000 in tax benefits for a typical funeral home.

This strategy dates back to 1959 when the U.S. Tax Court allowed building owners to pursue component-based depreciation. In 2004 the IRS established a ‘Cost Segregation Audit Techniques Guide’; the Guide provides clear direction regarding how to establish the cost basis for non-structural building components and which depreciation time-lines to use for electrical wiring, plumbing, partitions, carpeting, finishes, parking lots, landscaping (and other qualifying components).

Think of it this way; why depreciate, say, carpeting in a 39-year time-line as if it were a structural steel beam? The IRS allows building owners to depreciate many such items in a more appropriate 5-year time-line. In fact, roughly 20% of your Funeral Home could likely be moved from 39-year to 5-year time-lines!

And just when you think you’ve died and gone to heaven (a little Funeral Home industry humor), it gets better! The IRS allows you to move such depreciation that you didn’t claim in years past, so-called ‘catch-up depreciation’, into your current tax year without having to do an amendment. Your CPA can move this ‘catch-up’ figure to your current tax year through a simple 481 change in accounting method.

The IRS recommends that building owners wishing to take advantage of this logical and well-established tax strategy conduct an Engineering Based Cost Segregation Study which documents:

A building’s qualifying non-structural components and
The depreciable cost basis for each of those components

The Study also places each component in the appropriate time-line per the IRS Guide.

For additional information contact us.

Auto Dealerships See Tax Benefits From Renovation

Many automobile dealerships implement significant renovations as the industry morphs due to technology changes and as manufacturers rebrand. The goal of the renovations are, of course, to improve top line performance (sales).

Top line goals can effectively be achieved more quickly by capitalizing on the tax benefits associated with the renovations; for instance, it’s not uncommon for $1MM in renovations to conservatively equate to a $60,000 tax related improvement in the bottom line. Given a 10% profit margin, that equates to a $600,000 increase in top line results.

What Tax Benefits?

Tax benefits associated with construction costs can be procured through an Engineering Based Cost Segregation Study. This Study applies tax compliant depreciation time-lines to certain non-structural components. For instance, instead of depreciating carpeting over 39 years as if it were a structural item, it would be depreciated in five years. Many other non-structural building components can be depreciated in 5, 7 and 15 years versus 39 years.

Furthermore, the tax benefits of properly depreciating current renovations can apply to the entire existing facility, including past renovations (see “The #1 Lie About Cost Segregation“).

So, here are the benefits of reducing Federal and State taxable income by safely ‘accelerating’ depreciation on certain building components with a rigorous Study:

New renovation, purchase or construction will result in increased cash flow in the first 6 years.
Owned for 5 or more years qualifies for all unrealized depreciation carried forward into the current tax year.

From our experience, its not uncommon to document as much as $200,000 in accelerated depreciation per $1MM worth of building; assuming a 35% tax rate, the resultant reduction in taxable income would translate to a $70,000 bottom line improvement.

A project fee for a Study is typically between $10,000 and $20,000 per building, and can depend on property size, construction quality, location, availability of accurate construction documents, other.

So, a $2MM building could provide a $140,000 bottom line improvement; that’s about a 10:1 benefit-to-cost ratio for performing the Study (…and that’s not considering the net cost basis of the Study after writing it off as a business expense!).

In summary, cost segregation analysis is a logical tax strategy dating back to 1959 when the Tax Court first allowed component-based depreciation of buildings (though greatly clarified over the past decade with the IRS’s Audit And Technique Guidelines). Even properties purchased years ago can capture benefit with a very attractive cost-to-benefit ratio for performing an Engineering Based Cost Segregation Study. Any auto dealership whether purchased, constructed or renovated for costs in excess of $500,000 should consider this service.

To stream a 3-minute video regarding this topic, please click here.

For additional information contact us here.

Specialized Tax Incentives for Auto Dealerships

Auto dealers have two major tax incentives available to them, yet most are not taking advantage and consequently losing money. The main programs that most in this industry are missing out on are:

Engineering-based Property Cost Allocation
Property Tax Reduction

Engineering-based Cost Allocation

Engineering-based cost allocation identifies opportunities for federal, and in some cases, state tax advantages to owners of commercial industrial real estate by accelerating the depreciation on their property.

Taxpayers are typically correct in depreciating personal property such as equipment and furniture over five or seven years, but they often neglect available federal and state tax benefits by erroneously depreciating their entire investment in constructing or acquiring a building over 39 years. To do this correctly, one must hire an experienced engineer with a thorough understanding of construction finance. The engineer will review all blueprints, architectural drawings, and electrical plans to isolate structural and mechanical components from those that are considered personal property in addition to identifying architectural and engineering fees that can be segregated. The resulting cost allocation report will allow a taxpayer to:

Adjust the timing of deductions thus maximizing tax savings
Create a complete audit trail to resolve any IRS inquiries
Capture immediate retroactive savings on qualifying properties
Reduce real estate tax liabilities significantly

Property Tax Reduction

Probably the most frustrating bill that comes each year (or in some cases, twice each year) is the property tax bill. As of this writing, our studies indicate the average Auto Dealer in the United States is being overcharged by 20% on their property taxes. There are many reasons Auto Dealers are overcharged but mainly it is the result of improper assessments by the municipality. If you own an Auto Dealer and are paying property taxes over $50,000 per year, you should have a review completed on your facility. Reductions in this area are direct to your bottom line!

If you have not had a thorough review on your facility, especially as it relates to the areas of Property Cost Allocation, and Property Tax Reduction, you are likely losing money that should remain in your pocket.

Restauranteurs – Stop Losing Money!

Restaurants have two major tax incentives available to them, yet most are not taking advantage and consequently losing money. The main programs that most in this industry are missing out on are:

Engineering-based Property Cost Allocation
Property Tax Reduction

Engineering-based Cost Allocation

Adjust the timing of deductions thus maximizing tax savings
Create a complete audit trail to resolve any IRS inquiries
Capture immediate retroactive savings on qualifying properties
Reduce real estate tax liabilities significantly

Property Tax Reduction

Probably the most frustrating bill that comes each year (or in some cases, twice each year) is the property tax bill. As of this writing, our studies indicate the average Restaurant in the United States is being overcharged by 10% on their property taxes. There are many reasons Restaurants are overcharged but mainly it is the result of improper assessments by the municipality. If you own a Restaurant and are paying property taxes over $50,000 per year, you should have a review completed on your facility. Reductions in this area are direct to your bottom line!