Sawmill Tax Strategy Case Study
This case study reviews The Capstan Course taken to assist the owner of a sawmill with some innovative tax strategies.
A successful manufacturer of wooden pallets was faced with a quandary. The demand for their high-quality product was soaring, but the closing of numerous sawmills in his area left him scrambling for sufficient raw material. The manufacturer decided to open his own sawmill to ensure the availability of lumber, and purchased a property for this purpose. It was subsequently determined that much renovation was required. The main building was destroyed and replaced by the construction of three new entities. This process was costly. This pallet manufacturer approached Capstan in the hopes of recouping part of this expenditure through the use of innovative tax strategies.
After considering the client’s history and evaluating the scope of the property the Capstan team recommended an Advanced Cost Segregation Study (ACSS). Three new buildings and the three preexisting structures were to be analyzed. The entire property had been placed in service simultaneously just a few months prior. The Capstan team encouraged the client to maximize depreciation deductions from year one by performing a timely ACSS.
The scope of the study was significant, involving land improvements, installation of a septic field, building construction from the footers up and considerable improvements to the existing structures. The Capstan engineer faced a challenge in the unique nature of the property — sawmills require specialized and unusual equipment. The assigned engineer researched the nature of the modern sawmill in advance, and arrived at the site armed with the knowledge required to accurately evaluate all included equipment.
The homework paid off – an incredible 75% of real property was moved to personal property when all buildings on site were included. When the engineer focused on the new construction alone, the results were even more striking. Since the new buildings were placed in service between 1/1/08-12/31/14, they were eligible for 50% bonus depreciation (basis of $6.9 million). This resulted in an automatic write off of over $2.6 million and a corresponding tax savings of $1.3 million in the first year alone.
The pallet manufacturer was thrilled with the results and felt confident in his decision to expand into the sawmill industry.
Capstan issued “The Capstan Warranty” to the client, providing audit support up to the field agent level at no additional cost should the project ever be audited by the IRS.