Cost Segregation for Manufacturing
These facilities may have process related specialized plumbing and electrical needs of varying degrees, specialized mechanical equipment, equipment foundations, millwork, office areas, computer equipment connections, security equipment connections, and glued down finishes. Common land improvements at these facilities often included concrete and asphalt paving, landscaping, storm water drainage, and fencing.
Accelerating the depreciation on 19% – 64% of the capitalized costs is typical, depending on what is manufactured and the processes involved, the use of the entire building, i.e. manufacturing areas verses warehousing areas verses office areas and extent of the site improvements.
Case Study – Food and Beverage Manufacturer with Retail Facilities
The subject manufacturer is a corporation that originally began production in 1993. Beginning in 2008, the company started a program of expanding their current facilities and acquiring other smaller producers. They also diversified by opening retail facilities and marketing offices, around the country, during this period. Some of these acquired properties were purchased and some were leased. The total costs of the acquisitions and improvements were $22,224,000. For tax years 2008-2018, the manufacturer erroneously classified some manufacturing personal property, Qualified Leasehold Improvement Property, Qualified Restaurant Property, Qualified Improvement Property, and site improvements as building property.
In 2019, the Source Advisors Cost Segregation engineers were engaged to do a full fixed asset review to identify opportunities to properly classify the costs of these transactions that spanned this 10-year period. Some of the properties required a full cost segregation study to properly allocate the capitalized costs using architectural plans with detailed cost files and invoices, while other required invoice reviews for proper classifications. They conducted a thorough inspection of some properties where improvement projects were done. 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.
Source Advisors reclassified 9% or $2,013,000 into Qualified Leasehold Improvement Property, Qualified Retail Improvement Property, and Qualified Restaurant Property, 3% or $605,000 to 15-year land improvements and 20% or $4,421,000 as 7 and 5-year tangible personal property. In this example, the taxpayer had chosen to opt out of bonus deprecation in most years, if the full benefits of bonus depreciation were realized, the benefits would have been higher.