Owning a car dealership can present a golden opportunity to reduce your tax liabilities. One such opportunity is cost segregation, allowing dealerships to speed up depreciation deductions, which can lead to significant tax savings early on. In this article, we’ll break down cost segregation, explain how it works, and show why it’s crucial for improving your cash flow and overall financial bottom line.
Cost segregation is a tax strategy involving an engineering-based analysis that identifies, segregates, and reclassifies various property components that can be written off faster than others instead of spreading out the depreciation over 39 years. Cost segregation allows you to classify certain portions of the property, such as parking lots, showrooms, service centers, and offices, into shorter depreciable periods, such as 5, 7, or 15 years. This means larger deductions early on, which can reduce your taxable income and free up cash for other investments.
A cost segregation study is typically conducted by cost segregation specialists, engineers, construction professionals, and/or tax experts who specialize in this field and follow IRS guidelines. The studies typically are completed in several steps:
Bonus depreciation is a tax incentive created by Congress that allows businesses to immediately deduct a significant portion of eligible assets purchased, constructed, and/or renovated rather than writing them off over the asset’s “useful life.”. The rules and limitations have evolved over the years, and in 2017, the law changed again, which allowed for a 100% deduction for qualified assets through the end of 2022. As part of the change in law, bonus depreciation is scheduled to be phased down to zero in 20% increments from 2023 through the end of 2026. Starting in 2027, bonus depreciation will be suspended again unless Congress acts.
This deduction is another key tax incentive allowing dealerships to deduct the full cost of new and used qualifying equipment, software, and other assets in the year they were purchased rather than depreciating them over their “useful life.” In 2024, the maximum deduction is $1.12 million, with phase-out limits of $2.8 million.
Bonus depreciation and business interest deductions are interrelated and can impact how dealerships optimize their tax strategy. Even with interest expenses, a dealership can still benefit from bonus depreciation, but they need to ensure their total interest expense stays below certain thresholds to maximize deductions. Regularly reviewing your interest expenses and adjusted taxable income is a smart tax planning strategy.
If you’re a dealership, it’s worth exploring whether cost segregation is right for you and your property.
For more information on this topic, please contact a member of our team.
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