Cost segregation can put a serious dent in your tax bill

November 6, 2018|Lori Jore

The Tax Cuts and Jobs Act helped drive change in many areas of the tax code, including cost segregation. Dealerships may want to consider how a cost segregation study could be beneficial to their bottom line.

Whether you are constructing a new building, remodeling an existing property, acquiring an existing facility, or doing a combination of the above, each asset needs to be reviewed to see if it can be recovered over a shorter tax life or better yet, expensed in the current tax year.

Taking advantage of eligible tax deductions provides you with a cash flow benefit for your dealership—a concept that can be achieved by conducting a fixed asset review or cost segregation study.

However, improperly classifying assets for your dealership can cause you to “crash” and destroy potential tax deductions. This type of mistake can cost you significant tax dollars or worse yet, expose you to an audit by the Internal Revenue Service.

With that in mind, you might ask how dealerships were impacted with the recent Tax Cuts and Jobs Act (TCJA) and its effect on cost segregation studies. Well, let’s take a ride.

First Stop - Immediate Expensing, Section 179

  • The benefits of “Section 179 property” have expanded with TCJA!
    • The limit increased from $510,000 to $1 million
    • Section 179 property now includes improvements made to roofing, fire protection and alarm systems
  • Section 179 is the part of the tax code that has been highly touted as “immediate expensing.”
  • Section 179 benefits can be carried forward.

Next Stop – Floor Plan Interest

  • Dealerships won a reprieve from the business interest expense limitation in the preservation of a 100% deduction of floor plan interest.
  • Dealerships that are eligible for the preferential treatment on floor plan interest must claim it (it is not elective or optional). This leads to an unexpected trade-off. Any business that deducts floor plan interest cannot claim bonus depreciation on any property acquired by that trade or business.

Last Stop - Bonus Depreciation

  • For many companies, the benefits of bonus depreciation have expanded with TCJA, but virtually no dealerships will be able to take advantage of these expanded bonus depreciation provisions. For many companies (most dealerships excluded):
    • The bonus has increased from 50% to 100%.
    • Bonus depreciation applies to new and used (acquired) property through December 31, 2022.
  • Unfortunately for dealerships with floor plan financing, these bonus depreciation rules are unavailable because of the requirement to deduct 100% of their floor plan interest.

Remember, whether your assets are new or part of an acquisition of used property, buildings and some equipment costs may have their recovery periods reclassified to a shorter depreciation schedule.

Our cost segregation specialists at Schenck have experience in dealing with dealership assets, the tax issues related to your industry and the IRS. Our cost segregation team will also ensure you’re in compliance with IRS regulations regarding proper recording of assets. Combined, Bob Kaczmarek, ASA, and Lori Jore, PMP, PE, have managed and completed more than 5,000 cost segregation studies.

Contact us to learn more about how a cost segregation study could benefit you.

Lori Jore, PMP, PE, has more than 20 years of experience as an engineering professional, working with small, mid-sized and large companies to design processes and manage projects. Her experience includes providing facility- and process-related cost segregation services, energy analysis, simulation, and energy benchmarking services.