In recent years the rules surrounding depreciation have changed drastically. At the same time, many car dealerships have undertaken large construction projects. This has led to a number of car dealerships looking at cost segregation and the tax savings that a study can provide.
In order to encourage auto dealers to expand and modernize many manufacturers have offered programs to help offset the cost of these expansions. These programs have different names but are designed to help defer the cost of the expansion and modernization of dealerships. In 2014 the IRS put out a Legal Advice (Memorandum, AM2014-004) which stated that these payments should be considered income. This means that a dealership that goes through a $3 million renovation and receives payments of $1 million from the manufacturer to offset the construction costs, will have an additional $1 million in taxable income. This can create a huge tax liability for a dealership in the midst of an expansion. In order to offset that tax liability, many auto dealers are turning to cost segregation studies.
The benefits associated with cost segregation have only gotten greater in recent years. A few years back the IRS came out with the Tangible Property regulations. This opened up opportunities for dealerships to write off assets when they are removed from service. This means that a car dealership that renovates and expands can write off assets when they are removed to allow for new assets. For example, if a dealer removes lighting to allow for new lighting systems, the original lighting system can be written off at that time.
The benefits were made even larger with the new Tax Cuts and Jobs Act. Under the new tax bill items with a life of fewer than 20 years are eligible for 100% bonus depreciation. This will include items such as cabinetry, parking lots, and service equipment. Additionally, on renovations roof replacements, HVAC replacements, and much of the interior are eligible for 179 treatment, if the company is eligible for 179. This means much of the renovation can be written off in the year the renovation is complete.
Looking at this together means that taxpayers can realize significant benefits by reviewing these programs together. For auto dealers that received payments from the manufacturer, this can offset some of the additional taxes owed for these payments.
It is, however, important to make sure that the cost segregation provider understands the construction and the tax law associated with these programs. In recent years many dealerships have used Aluminum Composite Material panels or “ACM Panels” in the renovation and construction of dealerships. The tax handling of these has generated significant debate. While these panels are decorative, at times they also serve a structural or insulating purpose to the building. It is critical that items like this are reviewed by someone with experience in the tax law associated with depreciation, and the engineering and construction techniques utilized to build the building.
It should be noted that dealerships that deduct Floor Plan Financing are limited in their ability to utilize bonus depreciation. However, they still can access the benefits of increased 179. We will explore this limitation further in a future resource article.
As noted cost segregation can be a key tool for auto dealerships. If you have any questions about this or any other areas of deprecation law, please reach out to your McGuire Sponsel representative to discuss.