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Are Tax Savings Waiting on Your Doorstep?

Restaurants & Hospitality News
February 28, 2022
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Many restaurant and hotel property owners are often unaware of the opportunities for significant tax savings, and how to take advantage of them via a cost segregation study. This service utilizes reduced taxable income by maximizing the depreciation allowable on a property’s assets. The benefits of a cost segregation study can have significant effects for you and your business, as the cash flow saved by not paying a higher tax liability in the current year could be substantial.

When commercial property is purchased, a depreciable life is assigned to it. This depreciable life is typically 39 years, and the value of the asset “depreciates” over the 39-year life. As a result, the deduction received on the tax return is 1/39th in any given year. On a property purchased for $3,900,000, this would equate to $100,000 per year.

In contrast, a cost segregation study drills down into the depreciable lives of the assets. Instead of allocating the purchase price all to a 39-year life, it will assign a portion of the purchase to the furniture, fixtures, and other improvements whose lives may be much shorter than 39 years. This will have the following effect:

If the $3,900,000 property had $1,000,000 worth of furniture and fixtures at a 7-year life, this would mean that in one year, the depreciation would be approximately $142,000 ($1.0M/7 years) on that portion of the furniture and fixtures, and approximately $74,000 on the remaining 39-year lived assets (($3.9m-$1.0M)/39), for a total deduction of approximately $216,000—a significant increase. Instead of only a depreciation deduction of $100,000, you now see a deduction of $216,000. If your effective corporate tax rate is at 30%, this is a $35,000 savings in the first year alone.

If your business has not thought about a cost segregation study, now is the time to consider taking advantage of these potential tax savings. Please reach out to Jennifer Hogencamp at jhogencamp@citrincooperman.com or your Restaurants and Hospitality practice professional for assistance or to help answer any questions.