Cost Segregation for Manufacturing

Manufacturing includes a wide variety of categories including small family owned facilities with just a few employees to multi-national corporations with facilities scattered all around the globe. Activities involved in the manufacturing may be performed by one or a few personnel to hundreds of thousands of employees, and of course many of these facilities now have automated processes. The facilities may be owned or leased. Typically, the recovery period for manufacturing building property is 39 years. Most manufactures have recovery periods of 5 or 7 years for personal property and 15 years for site improvements. Some manufactures’ land improvements may have the same recovery periods as their personal property and in a few cases, manufactures may be able to treat what would normally be considered building property as personal property.

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

Facts

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.

Execution

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.

Result

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.

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