Dealerships that make mandatory image upgrades may be eligible for tax breaks, thanks to a new IRS ruling that allows certain expenditures to be deducted as an expense rather than capitalized as an asset.
Background
Property improvements generally require capitalization if the expenditure is a betterment, restoration, or adaptation of the use of the property but in many cases, dealership modernization efforts contain costs that can be expensed rather than capitalized.
Tangible property review
A tangible property review will evaluate your current and historic accounting methods to determine whether you capitalized or expensed your improvements in the following areas:
- 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
If an expenditure is determined to be a deductible item (supply or repair) under the new regulations from a prior year, you can "correct" those deductions in the current year while complying with the rules for current year expenditures. In many cases the IRS allows you to go back and re-cast previously capitalized assets as now eligible for expensing without amending returns.
Materials and supplies deduction
Incidental materials and supplies that are generally under $200 and consumed within 12 months (such as fuel, lubricants, and water) may also be deducted. These are items for which no record of consumption is kept and expensing the items does not distort income.
Energy efficiency deduction
If your dealership renovations included energy-efficient upgrades, you may be able to receive a tax deduction using 179D. To claim the deduction, building components must be tested and certified as attaining specific savings compared to a prior year energy standard.
Cost segregation
A cost segregation study can also help dealers save on their building upgrades. These studies identify the building assets which depreciate 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 reviews, a cost segregation study can help significantly increase your cash flow.
Eligibility
The tax incentives typically apply to dealerships built or renovated prior to 2014. These incentives are also available to commercial building owners or lessees for qualified new construction, renovations, or additions, 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
Tangible property reviews for dealerships
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 and 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 and in many cases, missed deductions from prior years can be corrected in the current year without the need to amend returns.