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CB&H Helps Growing Company Reduce Income Taxes with Cost Segregation

Scenario

A franchise retailer and customer service center, with more than 90 locations nationwide and over 50,000 customers, is responsible for sales in a select Virginia region. With only one location in the franchise territory, the company posted a loss in its first two years. In 2001, the company began expansion efforts and added three new locations leading to a spike in sales. Over the past three years, the company has added at least one new location each year, and sales have exceeded $10 million. The majority of the customer service centers are leased; however, the company bought a retail location worth $2.5 million in 2006.

CB&H Action Steps

The CB&H Cost Segregation team talked to the company about a cost segregation study when the building was initially purchased. We first prepared an estimate to illustrate the benefits of a study, and explained that tax savings generated by accelerating the depreciation expense would be worth more today than in the future. Next, a CB&H partner and our engineering alliance firm visited the company at the building to complete the free preliminary analysis.

CB&H conducted an estimate of building costs that qualified as 5- and 15-year depreciable property rather than 39-year. CB&H estimated that $975,000 of the building’s $2.5 million total cost qualified, resulting in a net present value (NPV) tax savings estimate of almost $150,000. The overall discount rate for NPV equaled 8%.

Results

The CB&H Cost Segregation team was engaged by the company to conduct a full study, and the resulting tax savings were greater than initially anticipated. CB&H saved the client $37,000 in taxes for 2006 and $62,000 for 2007. CB&H anticipates that these savings will continue for several years.