Due to the state of the economy in 2009, Dunkin’ Brands gave franchise owners a pass on their 10-year remodel obligations, but now franchise owners who were due to remodel last year or are due this year, by and large, will have to bite the bullet. So, in a still struggling economy, where can you turn for help with remodeling expenses? Cost Segregation is one answer.
With engineering-based cost segregation services, DDIFO Sponsors MS Consulting (sister company of Performance Business Solutions) and Bedford Cost Segregation (Bedford) can help you accelerate tax depreciation deductions and reduce taxes in order to generate cash flow savings.
“The reason we’re in business is because the vast majority of accounting firms don’t have engineers on staff,” said MS Consulting Director of Business Development Jeff Hiatt. “We serve as the back-office engineering department, helping clients maximize depreciation deductions. By having both engineers and CPAs in house, we’re really able to offer the whole package.”
If you have already had a cost segregation study performed on an existing building that you now need to remodel, you’re in great shape to immediately take advantage of un-depreciated values of assets in your store. If you haven’t yet had a study performed and need to remodel, you’ll want to work very closely with the cost segregation provider’s tax staff as well as with your own CPA to ensure you follow all applicable IRS rules and tax codes. It is important to note that cost segregation studies can benefit both those franchisees who own their shops outright and those who lease space.
Bedford’s Director of Business Development Bill Cusato itemized the three ways that cost segregation studies can help with a remodel as follows:
- by helping to pay for the remodel
- by enabling the write-off of assets that will be “retired” or thrown away in the remodel process
- by maximizing the depreciation of the remodel investment after the fact
Franchise owners often use the tax deferrals and benefits created by cost segregation to fund upcoming remodels. A cost segregation study on an existing property typically identifies depreciation that has been missed in prior years and enables franchise owners to take that depreciation in the current tax year, thereby increasing existing cash flow. In scenarios in which franchisees own multiple stores, they frequently will use the additional cash flow generated by a study or studies on one or more shops to fund the remodel of one or more other shops.
“What we find is, with the tax deferrals we create, we end up reducing the amount of borrowing that franchise owners have to do for remodel projects and the like,” said Hiatt. “In fact, I just met with a franchisee for whom we’ve been able to reduce half a million dollars in income tax, which will negate his need for a lot of borrowing.”
A Dunkin’ Donuts franchise owner who had cost segregation studies performed by Bedford on six of his existing shops was able to realize $1 million in depreciation in the first year and another $400,000 over the following four years. That franchisee said the additional cash flow gained through the studies would “serve to fuel our growth and remodels without having to go to the bank to borrow.”
A cost segregation study on an existing property can also be helpful when facing a remodel by creating a baseline of asset values, or an inventory of assets that may be discarded in the course of remodeling. These include such items as signage, millwork, floorings, wall coverings, and plumbing and electrical components. With properly documented values of such assets in hand as you go through a remodel, you would be able to take the write-offs associated with items you are throwing away or “retiring” that have not yet been fully depreciated. As an example, Cusato said that a $600,000 shop opened in 2003 might see $50,000 to $100,000 in current year write-offs in remaining values of its retired assets.
Once a remodel has occurred, you can achieve additional tax benefits and savings by having a post-remodel cost segregation study performed. “Any property with a remodel investment of $350,000 or more would likely benefit from a study,” said Cusato. “Typically, a property with a remodel investment of $350,000 would see as much as $100,000 in accelerated depreciation, and the study would create a baseline record of values that could be used the next time the property is renovated.”
Hiatt pointed out that if you begin working with MS Consulting as you gear up for a remodel, the company could not only determine what you can expect in terms of tax savings but also act to increase those tax benefits by working with your contractors to select the most beneficial products. For example, vinyl tile flooring may be advantageous over cement flooring as it can be written off over five years instead of 39 years. Helping you choose the right materials upfront can help you achieve tax benefits sooner than later. Further, Hiatt said there were bonus depreciations available in 2008 and 2009 related to renovated properties and that MS Consulting can help you go back and get any of those bonuses you may have missed.
Cusato indicated that a cost segregation study helps to ensure you are receiving the benefit of all available tax incentives. “Since 9/11, there have been numerous tax incentives to motivate investment in property, and a cost segregation study will often trigger those benefits that can be captured in the current year,” he said.
Both MS Consulting and Bedford offer free, no obligation analysis and estimates of savings upfront and both companies aim to ensure a high return-on-investment (ROI) for you. Hiatt said that Dunkin’ Donuts franchise owners usually realize a ROI of 10-to-1 or more and Cusato said, “If, in our upfront analysis, the tax benefit is not expected to exceed 10 times the study fee, Bedford typically would recommend against the study.”
Moreover, in addition to its already competitive pricing, MS Consulting offers a DDIFO member discount of $200 per store when you sign on for cost segregation. Bedford has standardized pricing for Dunkin’ Donuts franchise owners which is discounted from the pricing for other clients and is about 50 percent lower than it was just a couple of years ago.
MS Consulting and Bedford also offer free post-study consultation to walk you and your CPA through the report, help you interpret the results and provide guidance for taking advantage of the tax benefits. In addition, both firms will provide free audit support if necessary.
You are encouraged to find out more about how cost segregation can help you with a remodel, generate considerable tax savings and increase your cash flow by reaching out to MS Consulting and Bedford. Jeff Hiatt can be reached at 888-989-0054 or firstname.lastname@example.org; Bill Cusato at email@example.com or 978-263-5055.