Car Washes and Their Unique Cost Segregation Study Benefits

[Julio Gonzalez]

Cost Segregation is a bit of a buzz word these days, but in case you aren’t familiar with what a cost segregation study is, let me explain. A cost segregation study is a strategic tax planning tool that separates the assets that have a shorter useful life and can be depreciated over 5, 7 and 15 years from the residential rental property or nonresidential real property that are depreciated over 27.5 and 39 years, respectively. By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. This also allows for property owners to more easily write-off assets that get damaged/destroyed as the value of these assets is determined as part of the study. You will receive a report as a result of the cost segregation study that supports the breakout between asset classes and new depreciation schedule in the event that you are audited by the IRS.

Specifically related to a car wash, the commercial building is typically depreciated over 39 years. However, with a cost segregation study, many of the part can be depreciated over a much shorter useful life.

The components of a property can be classified into 4 categories.

• Land improvements
• Personal property within the building
• Specific indirect construction costs
• Non-structural elements of the building

Performing a cost segregation study and reallocating the property’s assets among these categories allows you to get the benefits of earlier depreciation deductions which reduces your taxable income, putting more money back in your pocket.

So why is this strategy great for car washes specifically? Typically, car washes have many assets that are not part of the building themselves that are eligible for accelerated depreciation such as:

• Water reclamation systems
• Automated teller stations
• Car wash systems
• Drying systems
• Other specialized equipment

Car washes are frequently upgrading their technology and equipment in order to remain competitive, thus the benefits of cost segregation are continuously utilized. With each piece of equipment that is upgraded or replaced, there’s depreciation that can be accelerated. The potential tax savings benefits from a cost segregation study on a car wash typically range from 60-100%.

Cost segregation studies can benefit both new and existing car washes. For new construction or acquisition car washes, the study can be conducted during the planning and construction phase so that the assets are categorized correctly from the start. This leads to a lot of tax benefits in the initial years when having increased cash flow is often most valuable. For existing car washes, properties that have been purchased, built or remodeled within the last 15 years are excellent candidates for a cost segregation study. This could lead to a catch up depreciation deduction without having to amend prior year tax returns.

If you own a car wash, have you considered cost segregation?