Understated Real Estate Depreciation Uncovered and Reclaimed

CHALLENGE: A manufacturing client with annual sales of approximately $15 million was operating out of an office/warehouse facility with 136,000 total square feet in separate buildings. Our initial review showed that their previous accountant had depreciated all real estate on the corporate tax returns using 39-year lives. We noted that the facilities were constructed specifically with the client’s operations in mind and that many modifications had been made to accommodate custom manufacturing processes, suggesting the client’s real estate should have been filed differently.

SOLUTIONS: We initiated a cost segregation study for the client’s real property. Our review identified many items that should have been classified as personal property and land improvements on the client’s tax returns. As personal property and land improvements, these items should have been depreciated using 7- and 15-year lives. As such, our client’s depreciation deduction had been understated for several years. We pursued a change in accounting method with the taxing authorities to correct this misstatement and to properly claim these deductions.

RESULTS: Our client realized tax savings of $300,000 in the year of filing this change. In addition, future year depreciation deductions were accelerated and our client was able to write off an additional $400,000 over a much faster time period than the original timeline. We ultimately made a real difference for this client. What others may not recognize as an opportunity, we realize as minimum service expectation.

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