This case study focuses on a chain restaurant with locations in various cities in Southern California. In addition to performing a cost segregation study on these restaurants, a thorough Repair vs. Capitalization study was done to provide a bigger benefit. Essentially, we took advantage of the new changes to the tax code that was implemented this year.

The challenge here was looking at the fixed assets and identifying which assets could be expensed or retired. Clients who are unfamiliar with these new rulings might not understand what may or may not be written off. With the help of KBKG and the team of engineers who are experts in this industry, a Repair vs. Capitalization study could be performed to maximize tax savings.

As mentioned, the goal for a Repair vs. Capitalization study is to identify assets that could be expensed or retired. Therefore, it is important to understand the scope of work behind each leasehold improvement. The steps to complete a repair vs. capitalization study are as follows:

1. The first step is to request invoices for the work that was performed. These invoices may give a general idea of what improvements were done.

2. If invoices are not available, or if the scope of work performed is still unclear, the next step would be to interview the client or personnel who are familiar with the construction process. Initially, general questions that should be asked are:
– What is the scope of work done?
– What is the purpose of the improvement?

3. After getting a better understanding of the scope of work, follow-up questions may be necessary to get a better grasp on the specifics of the work performed. Follow-up questions include:
– What was the existing condition prior to the improvements?
– What percentage was replaced?

4. Review prior cost segregation studies that were done. Prior cost segregation reports can depict a good idea of what was existed prior to the improvements.
The aforementioned steps are only a general guideline that could be taken to perform a Repair vs. Capitalization Study. The problem at hand is still identifying what could be classified as abandoned assets and what could be classified as expensed items. A cost segregation engineer can perform a detailed analysis to determine what construction components should be retired and expensed.

With a basis of approximately $4.4 million, this restaurant chain was able to reclassify over $500,000 as 5-year depreciation and over $3 million as 15-year depreciation from a cost segregation study. In addition, a Repair vs. Capitalization study resulted in over $550,000 that could be expensed! As a result, a significant amount of tax savings were achieved with the addition of the Repair vs. Capitalization Study.

For more information, please contact KBKG.

Author: Malik Javed