Cost Segregation for Distribution Centers

Distribution centers can come in all imaginable sizes and are located in every part of the country. Many reach sizes in the hundreds of thousands of square feet and are surrounded by many acres of paving. Although typical distribution centers have relatively little personal property qualifying for reclassification, the sheer size of many of the buildings has made them good opportunities. In addition, specialty distributions centers such as those that provide cold storage may have more personal property than typical distribution centers. Recovery periods are 39 years for buildings, 15 years for land improvements, and 5 or 7 years for personal property.

Typical reclassified property includes battery charging electrical connections, trash compaction connections, conveyor system connections, protection equipment such as guardrails and pipe bollards, dock equipment connections, air circulators and celling fans, and other specialized electrical systems. Offices and breakrooms may have glue on finishes. There may also be data connections and security system connections. Land improvements usually include extensive paving with reinforced truck aprons, fencing with motorized gates or guard stations, site lighting, rail spurs and associated improvements, and extensive storm water drainage improvements. Some distributions centers may have fuel stations. Newer distribution centers may have upgraded landscaping and site décor lighting.
Accelerating the depreciation on 5% – 35% of the capitalized costs is typical, depending on the type of distribution business, building and personal property systems needed, and extent of the site improvements.
Case Study – Distribution Center for the Landscaping Industry

Case Study – Distribution Centers

Facts

The subject property is a newly constructed 97,000 square foot distribution center. It is situated on 19 acres and was placed-in-service in 2018. The company is a distributor of chemicals and other products for the commercial landscaping industry.

The building has a showroom with offices on the 1st floor and a small mezzanine with typical finishes and equipment connections. The warehouse also has typical finishes and equipment for this type of facility. In addition, it has a seed cooler room with specialized mechanical equipment and special electrical connections for lighted racking that qualified as personal property. Land improvements included all concrete paving, fencing, a rail spur, landscaping, and a covered fuel island.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the construction cost. Contractor payment applications, record ledgers, and architectural plans were analyzed for proper building, land improvement, and personal property classifications. They conducted a thorough inspection 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 31% or $2,450,000 as 15-year land improvements and 13% or $1,030,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the specialized mechanical equipment, the extensive concrete paving, the rail spur, and the fuel island. Construction for this facility was well under way prior to 09/27/20; therefore, personal property and land improvements qualified for 40% bonus depreciation under the PATH Act.

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