Cost segregation delivers income tax refund for small-town theater owner! Instead of writing a check to the IRS, the owner is cashing one from the IRS!
A business owner’s CPA shared the benefits about cost segregation with his client who owns a million dollar commercial building converted into a theater decades ago. A beautiful structure in a downtown area, it shines with old turn-of-the-century grandeur sporting all manner of decorative lighting and chandeliers, cut-glass display cases and intricate wood-work…not to mention a beautiful and ornate grand staircase.
The CPA recommended his client have a benchmark analysis applied to determine the efficacy of accelerating depreciation on his theater. We reviewed all cost data, appraisal, tax records, and an old architectural drawing of the floor plan and determined a potential of 28% of the real property could be reclassified to Section 1245 short-life property for IRS tax purposes. According to the IRS Audit Techniques Guide for Cost Segregation, Modified Accelerated Cost Recovery System (MACRS) is the method required to depreciate assets such as carpeting, secondary lighting, cabinetry, dedicated plumbing and electrical, landscaping, sidewalks and curbs, signs, fencing, and more.
These assets are considered tangible personal property and land improvements by the IRS. Tangible personal property is called Section 1245 property under the IRC and is normally depreciated over 5 years (although occasionally 7 years). Land improvements fall under the Section 1245 classification but are depreciated over 15 years. When these assets are reviewed under the microscope of an engineer-based cost segregation study the IRS applies an “automatic acceptance” protocol to the cost segregation study’s results.
Within 30 days of the IRS receiving and accepting the cost segregation study report, sent by the client’s CPA and attached to IRS Form 3115, the IRS credits the tax-payer’s account, per se, with the accelerated income tax credit or refund.
After the site analysis was completed by a PE trained in cost segregation, it was determined the theater actually contains 32% of it’s fixed asset basis in 5-year tangible personal property. It was further ascertained the theater included 9% of it’s fixed asset basis in 15-year land improvements. The results of the cost segregation study delivered a total of 41% of the original real property assets reallocated to 5- and 15-year short-life categories.
The theater owner’s 35% income tax bracket converted the accelerated depreciation of over $300,000 to an excellent $105,000 federal income tax refund. Cost segregation works every time it is applied!