Cost Segregation for Gas Stations: Is It Worth It?

If you have bought or built a gas station, you have probably been told you can "save tens of thousands in tax" with a cost segregation study. That is sometimes true and sometimes oversold. A cost segregation study does not create deductions out of nothing. It changes when you take them, pulling depreciation forward so that you pay less tax in the early years. Whether that is worth the fee depends on your numbers.

This article explains what it is, what in a gas station can qualify, who benefits, and what to ask before you pay for one. It is general information, not tax advice, and the rules, including bonus depreciation percentages, have changed repeatedly in recent years. Confirm the current rules with your CPA.

What cost segregation is

When you buy a commercial building, the tax rules normally treat the whole building as one asset depreciated straight-line over 39 years. A cost segregation study, prepared by an engineer or specialist firm, breaks the purchase into components, such as land, building shell, and a number of items that qualify for much shorter lives, commonly 5, 7 or 15 years. Shorter lives mean larger deductions earlier.

Land is never depreciable, so the study also helps make sure the land value is not overstated.

What can qualify at a gas station

Gas stations are good candidates because so much of the property is not "building":

• Site improvements (often 15 years): paving, canopy foundations, drainage, curbing, lighting, signage bases and landscaping.
• Equipment and fixtures (often 5 or 7 years): dispensers and related equipment, point-of-sale systems, coolers and refrigeration, shelving, car wash equipment, and certain electrical and plumbing serving equipment rather than the structure.
• Fuel system components: some tank and piping components may be classified separately from the building, depending on the facts and the study.

Which items qualify, and for how long, depends on the facts and on how the asset is classified under the tax code. That is why the study exists.

Who tends to benefit

• Owners who bought or built a station recently and expect significant taxable income from it or from other sources.
• Owners who hold the property for years, so the timing benefit is not undone by a quick sale.
• Stations with a high share of equipment and site work compared with the building itself.

Who may not

• Small purchases, where the fee may eat most of the benefit.
• Owners with little taxable income, who cannot use the extra deductions now. Large losses may be limited or carried forward, so the benefit is delayed.
• Owners likely to sell soon, because accelerated depreciation can be recaptured and taxed on sale.

The trade-offs

• Depreciation recapture. When you sell, some or all of the extra depreciation can be taxed back, sometimes at ordinary rates rather than capital gains rates. The benefit is mainly deferral, not elimination.
• Cost. Studies are charged a fee, which varies with the size and complexity of the property. Compare it with your realistic first-year saving.
• State rules. Some states do not follow federal bonus depreciation, so the state benefit may differ.
• Passive loss limits. If the property is owned in an entity and you do not materially participate, losses may be limited. This is where your entity structure matters, as we discuss in entity and tax structuring for gas stations.

Cost segregation on an older purchase

You may be able to catch up. If you bought a station in an earlier year without a study, a specialist can sometimes do one now and you claim the missed depreciation through an accounting method change, rather than amending old returns. Your CPA will advise whether this applies to you.

Questions to ask before ordering a study

1. What is my realistic first-year tax saving, after the fee, and how is it calculated?
2. Can I use the deductions now, given my income and how the property is owned?
3. How long do I expect to hold it, and what recapture would I face on a sale?
4. Will my state follow the federal treatment?
5. Does the firm prepare a detailed engineering report that will stand up to review?

Getting your books ready

A study is much easier, and cheaper, if your purchase documents and construction or equipment invoices are organized. Accurate fixed-asset records also help when you sell a station or apply for a loan. Our acquisition and disposal support includes setting up the asset records, and our guide to common depreciation mistakes covers related errors.

If you have bought a station in the last few years and have not discussed this with your CPA, it is a short conversation worth having.