Cost Segregation for Daycare Centers

Daycares generally have classrooms that may be separated by full partitions or by partial barriers that also allow controlled visual or acoustical connections to other groups. Classroom equipment and durable goods play equipment, academic equipment, presentation equipment, audiovisual equipment, computer equipment, food service, and hygiene equipment can be classified as 5 –year property. Daycares can also have 15-year site improvements such as play yard space that may include fencing, canopies, sidewalks, ground cover, drainage, play structures, and landscaping.

Security is typically tight, with a controlled single access point for parents.
Accelerating the depreciation on 20% – 40% of the capitalized costs is typical, depending on the amenities and security of the facility as well as the extent of the site improvements.

Case Study – Daycare Center (High End)

Facts

The subject property is an 11,700 square foot daycare center that was newly constructed in 2017 for $6,100,000. The building is a one-story, wood frame structure, with Hardie Board siding, stone veneer, and a composite shingle roof. Interior finishes include vinyl plank flooring, extensive millwork and acoustical ceiling tiles. There is one controlled access point into the daycare center.

The building included classrooms, nurseries, office space, solar panels, laundry facilities, furnishings, and a kitchen area. There were also site improvements such as asphalt paving, sidewalks, significant landscaping, playground equipment, fencing, artificial turf, site drainage, site lighting, and a CMU wall surrounding the playground.

Execution

The Source Advisors Cost Segregation engineers analyzed the 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 $620,000 as 15-year land improvements and 19% or $460,000 as 5-year tangible personal property. Source Advisor’s findings exceeded the normal expectations for this building type due in large part to the high end nature of this particular facility, as well as the inclusion of the playground equipment, interior furnishings and the solar power system in the study. The property qualifies for 50% bonus depreciation under the PATH Act.

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