Aug. 11, 2008 – Landmark ruling could impact dealers’ tax savings
August 11, 2008
Filed under Features
A landmark tax case that’s more than a decade old figures to get more immediate attention in the powersports industry as dealers consider its potential cost-savings consequences.
The 1997 court case enabled commercial property owners to more quickly depreciate parts of their building, providing increased federal tax breaks and of course, ultimately, cash savings.
“I’m wishing I would have known about it sooner,” Cassey McClennan, the owner of Rio Yamaha, a Las Cruces, N.M., dealership, said about the impact of the court case.
That case involving a U.S. hospital corporation allowed companies to separate their buildings into different depreciation categories. That was a marked difference from before, when all commercial buildings depreciated at a lengthy pace of 27.5 or 39 years. Now parts of commercial buildings can be depreciated at 5-, 7- or 15-year periods under a process called cost segregation.
Even though the hospital court case is more than a decade old, the process is hardly a familiar one, both inside and outside the powersports industry, says Paul Correa of Cost Segregation Services Inc., an engineering company that performs such services.
“Only 10 percent of qualified business have done this,” Correa said, “and for owners of $1 million-$2 million buildings, like a lot of powersports dealers have, it’s probably less than that.”
McClennan is one dealer that has done it.
“Most dealers, if they are like me, you’re worried about running the day-to-day and a lot of things like this building depreciation is something that you don’t really put a lot of thought into,” she said. “It’s like, yeah, I own the building but you’re not a CPA so you don’t put your energies into that.”
McClennan hired Cost Segregation Services Inc., which produces something akin to an appraisal report that divides a building into different depreciation schedules. That report becomes the supporting document to the IRS for any increased tax breaks, Correa says.
Such a report, the IRS has said, should come from a company with engineering expertise due to complicating factors, Correa says. He used a light pole in a parking lot for an example. A light pole could have three different depreciation levels: one for the concrete at its base, a second for the metal around the pole and a third for the light itself.
“We’re literally going over every foot of that building,” he said of the cost segregation process report, which can take four-six weeks to complete.
McClennan will not see the effects of her store’s report — “a pretty painless process” — until the next tax filing season but she has been impressed with the process’ results. She said her accountant “feels it is very worthwhile and that it will save me quite a bit on taxes.
“I can say in retrospect, I should have known (about this process) because I’ve owned this building for five years and I could have taken advantage of these benefits for that amount of time.” psb