Bakery realizes $930,000 in savings through a cost segregation study
A Boston-area bakery with annual revenues of $2.8 million had outgrown its existing facility and purchased an existing manufacturing facility with the space it needed to grow. The company had to demolish and renovate significant portions of the structure to suit its needs, and also added administrative office space and a small retail store.
The company sought a cost segregation study in order to appropriately allocate the purchase and build-out costs among 39-year, 15-year and 7-year categories in order to accelerate depreciation deductions and improve its cash flow. They turned to RSM.
RSM worked extensively with this client to understand their processes and equipment, reviewing blueprints and other details to build a detailed picture of which portions of the purchase price and build-out costs should be allocated to each property class.
Because our client had to make substantial changes to the property in order to configure it to its process and production needs, it was clear that a significant amount of the purchase price and renovation costs could be allocated to the 15-year and 7-year property classes. We were able to reclassify approximately 6 percent of the purchase price as 15-year land improvements and approximately 65 percent of the renovation costs to 7-year property. Specific items reclassified were as follows:
- Costs for the demolition and reconstruction of portions of the floor and slab to allow for the installation of freezer equipment
- Seamless epoxy flooring applied to production areas to allow operations and meet food industry regulations
- Costs associated with the installation of underground piping for process waste, water and gas supplied for the ovens
- Large exhaust air systems to evacuate the heat generated by baking equipment and make-up air systems to maintain proper airflow
- A large freezer for storage of completed product as well as a glycol system to prevent under slab freezing
- Additional insulation throughout the facility
In addition to the $930,000 in tax savings we realized for this client through our cost segregation efforts, we also helped them input assets into their fixed asset systems so that they could more easily comply with IRS tangible property regulations on a prospective basis.