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Cost Segregation

Auto Manufacturer

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Overview

The property is a distribution warehouse acquired in 2019 by a major international automotive manufacturer serving its franchised retailers in New York and northern New Jersey. Over the next four years, CRS performed cost segregation studies for each of four phased expansions and renovations to the original 132,000 square foot building. This case study highlights the Phase 2 and 3 renovations, which cost a total of $19,395,000. Phase 2 involved gutting the building’s 30,400 square foot office area to add new offices, a board room, lunchroom, open office area, executive kitchen, coffee bar, wellness room, IT room, and bathrooms. Phase 3 was a renovation of the existing 75,200 storage warehouse to update its flooring, interior lighting, security system and loading dock equipment. Both phases were completed and placed in service in 2021.

Unique Challenges

The interior improvements qualified for a special asset class called Qualified Improvement Property (QIP). When a building is renovated, many interior assets that normally would be allocated to a 39-year depreciation period are then eligible for a 15-year depreciation period instead (plus bonus depreciation). Our engineers were challenged to discern between improvements made to the structure and building envelope versus interior modifications. QIP on this property was significant, enabling the client to gain substantial tax benefits.

Before Cost Segregation

If the client had not performed a cost segregation study, 100% of the renovated assets would have been treated as standard “real property” using a “straight-line” method that would only have generated first-year depreciation of $269,800.

After Cost Segregation

CRS reallocated a significant amount of the renovation assets to shorter depreciation periods, resulting in the following accelerated tax benefits and cash flow for the client:

55%
Property Reclassification

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Results

  • First Year Depreciation Increase - $ 232,300
  • First Year Tax Savings - $94,800

5-Year and 7-Year Personal Property Assets ($2,580,900)

  • Carpet
  • Window treatments
  • Cabinetry and shelving
  • Decorative teak wood paneling
  • Decorative pendant and accent lighting
  • Computer server room cooling units
  • Specialty sink
  • Telephone and data wiring
  • HVAC ionization and UV light purification system
  • Vinyl composite tile flooring
  • Stone countertops – coffee / print areas, lunch / wellness / rooms, kitchen, pantry
  • Specialty plumbing and electrical rough-ins
  • Security cameras
  • Loading dock equipment

15-Year Land Improvement Assets ($544,600)

  • Asphalt paving
  • Concrete curbs, sidewalks and paving
  • Site lighting and underground wiring
  • Landscaping
  • Underground storm drainage system

15-Year Qualified Improvement Property ($7,495,700)

  • Ceramic tile
  • Doors, frames, and hardware
  • Gypsum board
  • Bathroom vanities
  • Toilet partitions and accessories
  • Base building electrical and plumbing rough-ins
  • Stone bathroom countertops and windowsills
  • Exit sign and emergency lighting
  • Fire sprinkler system
  • Interior painting
  • Fire alarm system
  • Interior plumbing
  • Interior light fixtures and wiring
  • Epoxy floor coating
  • Interior demolition and carpentry
  • Security system

Additional Benefits

  • 100% bonus depreciation was available for the 2021 tax year.
  • CRS also performed two other cost segregation studies for the property owner: the original building expansion in 2019 and building improvements completed in 2023 as part of a new technician training center.
  • Phase 1 results: 28% of the original assets were reallocated to shorter recovery periods, which increased the client’s first-year depreciation by $6,466,000 and led to $2,640,000 in tax savings.
  • Phase 4 results: 75% of the original assets were reallocated to shorter recovery periods, which increased the client’s first-year depreciation by $13,205,000 and led to $5,251,000 in tax savings.
  • The client also entrusted CRS to perform a 179D energy-efficient certification on these renovations to gain additional tax benefits. Click here for the case study.
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