Distribution Center Cost Segregation Study
In today's rapidly evolving logistics landscape, commercial property owners in the warehousing and distribution sectors face constant pressure to streamline operations and maximize profitability. In this case study, we'll explore how the investors of a large distribution center and warehouse facility were able to achieve significant tax savings and cash flow improvements through the strategic implementation of cost segregation.
By meticulously analyzing the property's components and reclassifying eligible assets into accelerated depreciation categories, our team was able to frontload over $3.6 million in deductions in the critical first year of ownership. This delivered an immediate federal tax savings of $1.26 million - a substantial financial boost that empowered the owner to reinvest in enhancing their distribution center operations, pursuing new growth opportunities, or bolstering their overall financial position.
Warehousing & Fulfillment Property
Total Purchase Price: $18,000,000
In Service Date: June 2, 2022
Goal: Maximize tax savings through accelerated depreciation
Total Accelerated Depreciation:
$3,600,000
Additional Cashflow(Year 1):
$1,260,000
Asset Classification Results:
MACRS Assets Life | Cost Segregation Allocation | Original Allocation | After Cost Segregation |
5 | 11% | - | $1,980,000 |
7 | - | - | - |
15 | 9% | - | $1,620,000 |
39 | 80% | $18,000,000 | $14,400,000 |
5-Year Assets (11% of Total)
Amount Allocated: $1,980,000
Description: These qualify for accelerated 5-year depreciation and include specialized material handling equipment, dedicated electrical and mechanical systems, and select interior finishes.
Depreciation Rate: 5-year schedule, with potential for 100% bonus depreciation in Year 1.
15-Year Assets (9% of Total)
Amount Allocated: $1,620,000
Description: Land improvements such as paving, fencing, site utilities, and exterior lighting.
Depreciation Rate: Accelerated 15-year schedule with potential eligibility for bonus depreciation.
39-Year Assets (80% of Total)
Amount Allocated: $14,400,000
Description: The core building structure, including the foundation, walls, roof, and standard mechanical systems.
Depreciation Rate: Standard 39-year schedule.
Federal Tax Savings: Assuming a 35% tax rate, the $3,600,000 in accelerated depreciation could yield approximately $1,260,000 in tax savings for Year 1 alone.
Cash Flow Benefit: If the property qualifies for bonus depreciation, the 5-year and 15-year assets could potentially be fully expensed in the first year. This results in a total first-year depreciation of $3,600,000.
Summary
By strategically leveraging cost segregation, we were able to reclassify 20% of this $18,000,000 distribution center and warehouse property into shorter recovery periods. This frontloaded over $3.6 million in depreciation deductions, delivering significant tax savings and cash flow improvements in the critical early years of ownership.
Our team's expertise in engineering-based cost segregation studies ensures commercial real estate investors like yourself can maximize the tax advantages of your properties. By working with United Tax Advisors, you can be confident that every eligible asset is properly identified and classified according to IRS guidelines - minimizing your tax burden and positioning your business for long-term growth.