Dealerships that made mandatory image upgrades in recent years (or in the future) may be eligible for tax savings, thanks to recently released IRS regulations.
Dealerships that made mandatory image upgrades in recent years (or plan to in the future) may be eligible for tax savings, thanks to recently released IRS regulations. The new ruling allows certain expenditures to be deducted as an expense rather than capitalized as an asset.
“When packaged with energy tax credits and cost segregation methods, the tax savings can be significantly beneficial for many dealerships,ˮ says Sam McKay, a dealership manager with CliftonLarsonAllen. “In many cases the IRS allows you to go back and re-cast previously capitalized assets as now eligible for expensing without amending returns.ˮ
Acquiring versus improving a property
In general, the regulations distinguish between amounts paid to acquire or produce tangible property and the amounts paid to improve existing property. A taxpayer must always capitalize amounts paid to acquire or produce tangible property unless the property:
- Qualifies as deductible materials and supplies
- Qualifies under the de minimis safe harbor and conforms to the taxpayer’s safe harbor election
- Qualifies as an eligible repair deduction
For improvements to property, capitalization is required if the expenditure is a betterment, restoration, or adaptation of the unit of property. In many cases, dealership image modernization efforts will contain significant costs that can be expensed for tax purposes rather than capitalizing them when the improvement language of the regulations is not met.
Tangible property review
The new regulations are generally effective for taxable years beginning on or after January 1, 2014. But a tangible property review may be needed to evaluate your current and historic tangible property accounting methods. This will determine what changes are necessary to comply with the new regulations. Any taxpayer friendly adjustments from inconsistent treatment on assets capitalized in prior years allowed by these regulations must be made within the grace period provided by the IRS.
The new regulations include guidance relating to the following:
- Repairs and maintenance to tangible property
- The determination of the “unit of property”
- Incidental materials and supplies
- Depreciation and dispositions (including partial dispositions)
- Retail replacements and reconfigurations
- General asset account elections (if and when necessary)
If an expenditure is determined to be a deductible item (supply or repair) under the new regulations from a prior year, you can “catch up” those deductions in the current year along with ensuring compliance with the new regulations for current year expenditures.
Materials and supplies deduction
Incidental materials and supplies may be deducted when purchased. These are items for which no record of consumption is kept and expensing the items does not distort income. Materials and supplies that do not fit these definitions are deducted when used or consumed.
A deductible material or supply is tangible personal property, other than inventory, used or consumed in the taxpayer’s operations. This includes fuel, lubricants, water, or similar items reasonably expected to be consumed in 12 months or less. It also includes:
- Other property with an economic useful life of 12 months or less
- An item with an acquisition or production cost of $200 or less
- A component acquired to maintain, repair, or improve a unit of tangible property that is not acquired as part of a single unit of property
Energy efficiency deduction
If your dealership renovations included energy-efficient upgrades, you may be able to combine your tangible property deduction with a 179D deduction. This deduction allows owners of buildings to receive a tax deduction if their building renovations were completed with energy-efficiency in mind.
It provides an immediate first year tax deduction for specific energy-efficient portions of a new or remodeled dealership building. To claim the deduction, these building components must be tested and certified as attaining specific savings compared to a 2001 energy standard. Missed deductions from prior years can also be corrected in the current year without the need to amend returns.
“The energy credit was recently extended to include all of 2014, and if your qualified updates were placed in service prior to year-end you can still benefit,ˮ says Mark Colvin, a federal tax solutions manager with CliftonLarsonAllen. “Energy efficiency incentives often apply when a significant building remodeling takes place.ˮ
Qualifications
The deduction is available to commercial building owners or lessees for qualified new construction, renovations, or additions. The deduction applies to dealerships built or renovated between 2006 and 2014, including:
- New dealer buildings
- Remodeling and image modernization efforts of dealerships
- Dealers that pursued Leadership in Energy and Environmental Design (LEED) designation
Features that qualify:
- Lighting systems
- Heating, cooling, ventilation, and hot water systems (HVAC)
- Building envelope construction (i.e., insulation, doors, and windows) or retrofitting
A maximum deduction is allowed if the overall components attain a 50 percent energy savings compared to the standard, limited to $1.80 per square foot. Partial deductions are allowed for any one of the three systems that reach a required percentage of savings, with the deduction for each system capped at $.60 per square foot for each system.
Cost segregation and your dealership
A cost segregation study can also help dealers that have new upgrades to their building. These studies identify building assets which can be depreciated at an accelerated rate using a shorter depreciation life. These assets may be part of newly constructed dealership or existing dealer buildings that have been purchased or renovated.
“When combined with energy incentives and tangible property (repairs) review, a cost segregation study can help significantly increase your cash flow,ˮ notes McKay.
How we can help
We have saved our dealership clients over $5 million dollars to date, with an average cash flow savings of more than $150,000. We can evaluate your situation before work begins to provide an honest assessment of whether a real estate cost analysis is cost effective for your dealership. We do not charge a fee to determine if benefit potential exists. This allows us the ability to scope projects based on the expected benefit along with a reasonable fee quote.