Cost Segregation for Auto Dealerships

Auto dealerships tend to be great cost segregation opportunities due to the complexity of the service departments as well as the extensive site improvements such as paving and lighting. Service departments usually are comprised of a number of specialized systems such as; automobile exhaust systems, car washes, compressed air systems, oil distribution systems, oil interception systems to facilitate the remediation of hazardous waste, and other specialized electrical and plumbing systems. The parts department will often include a prefabricated, modular mezzanine system for storing the parts inventory. Although mezzanines are generally not of interest to cost segregation, the modular design of some systems facilitates the easy reconfiguration or removal and reuse of the system. At times there may be a detached drive-through automated car wash. Detached drive-through automated car washes could also qualify for a 15-year straight line class life.

It should also be noted that auto dealerships often require additional studies in future years as the manufacturers require the dealerships, though independently owned and franchised, to remodel the stores to meet ever changing corporate images.

Accelerating the depreciation on 25% – 45% of the capitalized costs is typical, depending on the number of service bays, quality of the finishes, and extent of the site improvements.

For more information please see the link below for the IRS Field Directive for Auto Dealerships.

Cost Segregation Audit Techniques Guide – Auto Dealership Industry

Case Study – Auto Dealership

Facts

The subject is a newly constructed auto dealership that was placed-in-service in 2019 for $2,200,000. The building includes 10 service bays, a customer’s waiting area, a showroom, a parts department with a metal plank mezzanine, and administrative offices. There were also site improvements such as asphalt paving, landscaping, fencing, sidewalks, site drainage and site lighting.

The building is a one-story, steel frame structure, with exterior metal paneling and aluminum storefront windows with a metal roof. Interior finishes include tile flooring, decorative millwork and acoustical ceiling tiles.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the actual construction costs, in the form of contractor invoices, and allocated the cost detail to various trades and building components. They conducted detailed estimates from the construction drawings and augmented those findings with additional estimates performed during the site visit of the property. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 26% or $570,000 as 15-year land improvements and 20% or $440,000 as 5-year tangible personal property. This property benefited from the high ratio of land improvements, in the form of extensive parking lots and lighting, to the overall cost of construction. It qualifies for 100% bonus depreciation under the Tax Cuts and Jobs Act.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years