Benefits of a Cost Segregation Study on Warehouses

[Julio Gonzalez]

Do you own a warehouse or are considering investing in one? Some would consider warehouses to be the backbone of today’s supply chain. There is a large demand for efficient distribution and storage of goods, thus many investors are looking for ways to increase their financial performance while continuing to remain competitive in the market. While automation and advanced technologies help with this goal, another strategy that is often overlooked is cost segregation. Cost segregation can help boost cash flow, create substantial tax savings, and increase the profitability of the warehouse operation by accelerating depreciation.

A cost segregation study is a strategic tax planning tool that separates the assets that have a shorter useful life and can be depreciated over 5, 7 and 15 years from the residential rental property or nonresidential real property that are depreciated over 27.5 and 39 years, respectively. By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. This also allows for property owners to more easily write-off assets that get damaged/destroyed as the value of these assets is determined as part of the study. You will receive a report as a result of the cost segregation study that supports the breakout between asset classes and new depreciation schedule in the event that you are audited by the IRS. Here’s an example of bonus depreciation.

Here are some of the current trends that are highlighting the importance of a cost segregation study.

• Contract Logistics Expansion: Experiencing growth in contract logistic divisions leading to outsourced warehousing and distribution activities.
• Warehouse Technology Advancements: Integration of AI, robotics and IoT allows for operational efficiencies including reduced labor costs and improved safety.
• Warehouse Automation Growth: Significant growth signals a need for efficiencies and the adoption of new technology.
• Warehouse Space Expansion: There are ongoing developments in the warehouse space to help support the growing demand for infrastructure and warehouse space.
• Robotics and AI investments: There is a demand for faster throughput and immediate fulfillment which is causing investors to invest more into AI and robotics.

Cost segregation becomes an even more critical tax strategy as there is an increase in investments in automation and technology as it frees up cash by creating additional tax savings.

Some of the financial benefits that a warehouse investor can expect from a cost segregation study include:

• An increase in cash flow for automation
• Immediate tax savings
• Enhanced warehouse property value
• Improved warehouse ROI by reducing tax liabilities and increasing cash flow.

There are many items that can be reclassified for accelerated depreciation through the use of a cost segregation study. Here are some items that are specific to warehouse:

• Loading Docks
• Interior Finishes
• HVAC Systems
• Safety and Security Alarms
• Land Improvements
• Specialized Electrical Systems
• Material Handling Equipment

As you can see, cost segregation can allow multiple items to be reclassified to shorter useful lives, accelerating depreciation and creating immediate tax savings. Have you considered a cost segregation study?