Recent Economic Stimulus Packages Provide Boost to Franchise Owners
By: Jacob D. Hopper, Bedford Cost Segregation
There have been a number of important tax savings provisions included in the recent stimulus packages that may provide significant benefit for Dunkin’ Donuts owners. This article deals specifically with the provisions that impact your real estate investments or those that can be maximized with a cost segregation study (CSS).
This article does not get into all the details of the various provisions, but is provided to point out the basics to make sure you are aware of them. There are of course nuances that apply to each that will depend on the facts and circumstances of your specific situation. Bedford Cost Segregation, a DDIFO Associate Member and supporter, is available to help you and your tax advisor understand these often tricky provisions in order to maximize value.
50% Bonus Depreciation – Extended through 12/31/09
This benefit allows you take a first year income tax deduction equal to 50% of the cost of “qualifying property” in the first year. With a newly built Dunkin’ store, anywhere from 30 – 60% of the construction costs including site improvements can typically be defined as “qualifying property”. This percentage is usually even higher with leased space.
For example…Owner A built a $500,000 Dunkin’ store in 2008. A CSS identified that 45% of the costs ($225,000) were “qualifying property” and eligible for bonus depreciation. Therefore, Owner A is able to take deduction of $112,500 in the first year, in addition to the regular depreciation taken on the remaining amount. At a 30% tax rate the owner will save $33,750 in taxes in the first year as a result of the bonus.
Qualified Restaurant Improvements – Modified for 2009
Qualified Restaurant Improvements (QRI) can be depreciated over 15-years instead of the standard 39-years. This provision has been around in some form or fashion since October of 2004, but the definition of eligible improvements has always limited the benefits for a Dunkin’ property. The definition has been changed for improvements made in 2009 which will allow many newly constructed Dunkin’ properties to qualify entirely as 15-year property providing substantial tax benefits.
In addition, a CSS can be performed to identify the items within the building that can be depreciated even faster – over 5 years – and are eligible for the 50% bonus mentioned above. This approach will even further reduce the taxes you owe today and can significantly improve your cash flow.
Qualified Leasehold Improvements – Extended through 2009
Owners who have made or are making improvements to leased space will want to know about the Qualified Leasehold Improvements (QLI). This provision also allows eligible improvements to be depreciated over 15-years instead of the standard 39-years and is not as limiting as the QRI provision mentioned above when it comes to leased space.
QLIs can be combined with bonus depreciation for 2008 and 2009 to significantly increase the costs eligible for the 50% bonus.
Net Operating Loss (NOL) – Increased Carryback Period for 2008
A Net Operating Loss (NOL) can be carried back to generate a refund of income taxes paid in prior years. This is important to know because in these challenging economic times many businesses are struggling and could greatly benefit form a refund check.
A CSS study may be an excellent way to generate enough depreciation deductions to produce losses that can be carried-back to claim refunds. The latest legislation temporarily increases the carryback period from the standard two years to a more generous five years for losses generated in 2008 (tax years beginning or ending in 2008). This strategy can produce some immediate relief and may be worth discussing with your tax advisor.
This strategy is not new, but it worth pointing out because it can produce significant value on a retroactive basis. A look-back study is a cost segregation used to “catch-up” on depreciation deductions that could have been taken already. If you have been depreciating your property using the standard 39-year recovery period this is an approach you will want to check out.
The results of the look-back study are compared to what you have already done with your depreciation. The difference between the depreciation you’ve taken and what you could have deducted if a cost segregation study was done when you initially put the property in service, which is usually significant, is taken in the current year.
All of the above mentioned provision and strategies can be used together with a cost segregation study to generate significant benefits. As mentioned, there are specific issues with each so it is always important to consult your tax advisor. Bedford Cost Segregation specializes in working with property owners and their advisors to maximize the benefits associated with cost segregation studies and related planning strategies.
For a complimentary estimate of benefits or to lean more contact Bedford Cost Segregation.