Driving Profitability: Specialty Tax Incentives for Dealerships

Auto dealerships are rich with untapped tax-saving potential. Two often-overlooked strategies -- Cost Segregation and Partial Asset Disposition (PAD) -- can unlock significant cash flow and optimize tax efficiencies.

The Diversity of Dealerships

Auto dealerships are complex properties featuring a variety of departments:

• Showrooms and sales offices
• Customer lounges and waiting areas
• Maintenance bays and service departments
• Car lots and parking areas

Each department requires a variety of different functional assets – this specialization makes dealerships excellent candidates for cost segregation.

Cost Segregation: Accelerating Depreciation, Boosting Cash Flow

Cost segregation is an engineering-based tax strategy that permits real estate owners to accelerate depreciation deductions.

Standard commercial building depreciation occurs over a lengthy 39-year period, but many assets within a structure -- from plumbing and electrical fixtures to flooring -- are not designed to last that long. In cost segregation, shorter-lived assets are identified and categorized into 5, 7, or 15-year recovery periods, which accelerates depreciation and improves cash flow.

Commonly reclassifiable dealership assets include:

• 5-Year: Specialized automotive equipment, carpet, carpet tile, counters and cabinets, sinks, specialty lighting and plumbing, dedicated outlets, intercom and sound systems, alarm and security systems, fire extinguishers and more  
• 7-Year Assets: Office furniture  
• 15-Year Assets: Land improvements like drainage pipes, parking lots, landscaping, protective bollards, sidewalks, and more 

A cost segregation study may be performed on a newly constructed dealership, a newly acquired dealership, or a dealership that’s undergone a refresh.

Ideally, it’s best to perform a study as soon as possible, to maximize tax savings from day 1. However, studies may also be performed well after a property has been constructed or acquired. These “look-back” studies permit owners to “catch-up” on the depreciation that would have gotten had the study been performed on day 1.

Consider Dealership ABC, constructed in 2021. The study wasn’t performed until 2023, but the results were still more than satisfactory:

• Depreciable Basis: $12.8M
• 2% reclassified to 5-year property
• 7% reclassified to 15-year property
• First-Year Tax Savings: $1,066,546

Partial Asset Disposition: Write Off the Old to Make Way for the New

Under the Tangible Property Regulations (TPRs), taxpayers can write off the remaining depreciable basis of a disposed asset using a Partial Asset Disposition – or “PAD” -- Election. This is especially useful in a refresh scenario, when many assets are simultaneously removed from service. A PAD Election may only be taken in the year in which the assets were retired, so it is a time-sensitive incentive.

Consider Dealership XYZ, which was originally acquired in 2012. A cost segregation study was performed at that time. Now flash forward to 2022 – Dealership XYZ was in desperate need of a refresh, and underwent major renovations including:

• Sales and showroom refinished and reconfigured
• New HVAC including rooftop units
• Upgrade to service write-up area
• New flooring throughout

Because Dealership XYZ already had a cost segregation study done in 2012, they already had documentation of what existed. Boyer & Ritter engineers performed an updated cost segregation study in 2022, the purposes of which were two-fold:

• To accelerate depreciation of eligible assets, as in every cost segregation study
• To determine which assets had been taken out of service, for the additional benefit of PAD Elections

Dealership XYZ’s depreciable basis was $4,925,000.

Engineers reclassified over 75% of assets in the updated study, resulting in a first-year tax savings of $1,307,000.

The engineers also provided an itemized list of assets removed from service, along with their remaining depreciable basis. Dealership XYZ’s owners were able to write off an additional $500,000 using PAD Elections, translating to an additional tax savings of $120,000.

With their unique focus on breaking out costs, cost segregation studies are the ideal way to generate the data required to justify PAD Elections and maximize tax savings.

An Extra Savings Opportunity

To meet the growing needs of the eco-conscious consumer, many dealers are having EV Charging Stations installed. 

If you’re among them, you should be aware of the Alternative Fuel Vehicle Refueling Property Credit, colloquially known as the EV Charging Station Credit. 

The Credit allows dealers to recoup up to 30% of the amount invested into the charging station.  If you’re already performing a cost segregation study, the components of the charging station will be quantified and costed, making the EV Charging Station Credit an easy add-on. 

One important note – under the One Big Beautiful Bill Act, EV charging station equipment must be placed-in-service by 6/30/2026 in order to qualify for the Credit.  

Key Takeaways for Dealership Owners

• Dealerships with rich asset mixes are great candidates for cost segregation studies – accelerated depreciation is possible in new construction, acquisition, and refresh scenarios
• Partial Asset Disposition can turn a routine refresh into additional tax savings – as long as the Election is taken in the year the asset was removed from service
• Cost segregation studies document disposed assets and support PAD Elections
• The EV Charging Station Credit is an additional incentive beneficial to dealerships
• These engineering-based strategies require a high level of skill – it’s important to choose the right partner

The Boyer & Ritter team is here to help. Contact us to learn how cost segregation and PAD can drive real value at your dealership.