About the Episode
In this episode, host Evan Roberts sits down with Ignacio Mendez, CPA, Tax Principal, and Nick Paluch, CPA, Senior Manager at Miller Cooper & Co. to unpack bonus depreciation, cost segregation, and how tax strategy directly impacts cash flow for capital-intensive operators. The conversation breaks down what qualifies for accelerated depreciation, why real estate-backed businesses like car washes are uniquely positioned to benefit, and how cost segregation can unlock significant upfront deductions.
We explore buyer vs. seller dynamics in purchase price allocation, Section 179 considerations, state tax nuances, and what documentation operators need to defend their positions. The episode also looks ahead at 1031 exchanges, audit realities, and why disciplined planning, clean records, and proactive tax strategy will separate strong operators as the market evolves over the next several years.
Check out the full transcript below
Evan Roberts:
Thank you guys so much for joining. We have Ignacio and Nick here from from Miller Cooper. We, you know, we have a few topics that we want to discuss, mainly bonus depreciation. But before we continue, we’d love for you guys to kind of introduce yourself, give a little bit about your background and Miller Cooper as well. Thank you guys for joining. Thanks, Evan.
Nick Paluch, CPA:
My name is Nick Paluch. I’m a senior manager here at Miller Cooper, been with the firm 13 and a half years. Excited to be here. You Nick.
Ignacio Mendez, CPA:
Evan again, thanks for having us. My name is Ignacio Mendez. I lead the Tax Group here at Miller Cooper. Miller Cooper is a firm of about 600 individuals, primarily focused in the middle market space. Anything has to do traditional accounting and tax services, consulting, M and A transactions and some HR consulting, along with some other services. But Nick and I are both members of the Tax Group. We spend our time working with individual business owners, private equity venture groups and a handful of publicly traded companies on everything that has to do with tax strategy. But you know that I think the topic for today is we’re going to be talking about some things related to depreciation. So happy to be here. I’ve been in practice for, oh boy, over 25 years. So you know, that beats me a little bit, and I’ve been at the firm for 21 years now.
Nick Paluch, CPA:
One of the hot topics for this past year is obviously the one big, beautiful bill, which re instituted 100% bonus depreciation on a lot of fixed assets that were previously scheduled to go down to 40% and it’s a good opportunity if, if any capital spend is planned going forward, a lot of things qualify. Basically, anything that’s got a 15 year tax life or less can qualify for a bonus depreciation, which obviously allows you guys to make take deductions in the year of spend. And if, as long as you know, capital spend keeps, keeps going forward, there’s lots of opportunities to reduce your taxable income in current year. And you know, get the benefit of of that sort of depreciation.
Ignacio Mendez, CPA:
Now, the only thing I’ll add is that the bonus depreciation rules, the bonus depreciation rules and Nick’s alluding to, is a, generally a windfall for for business operators that that have real estate in their operations. You know, a car wash, for example, would be a great example. But not only car washes, you know, manufacturing facilities that have a need for a building that they own. You know, they may have leasehold improvements, they may have a number of other significant expansions that they’re doing to their buildings or buying a building. And so what, what typically we find is that buying real estate that is connected to a operating business, like a car wash, for example, the business owner generally, will get some tremendous tax benefits. Because, you know, you think about traditional accounting, the traditional accounting rules say that if you invest in fixed assets, you get a deduction for those items over a period of time. But since 2001 we’ve had some variation of bonus appreciation, and today we live in an environment where Treasury has thought of a way to stimulate the economy. What better way to stimulate the economy than to incentivize business owners to buy equipment, buy, you know, hard assets, and reward them by basically saying, Okay, you spent $100,000 $200,000 to improve real estate, and it’s, you know, 15 year life or less. Take an immediate deduction for that item. Don’t take it over the traditional 39 year. So it’s a significant windfall. Yes, it’s time value of money. But you know, 39 year for something that you’re going to depreciate is a long, long time. And if you’re like most of our clients, they’re looking for deductions as quickly as possible. Great.
Evan Roberts:
How does cost, you know, segregation interact with bonus appreciation and a new build or an acquisition? You know? How do those two play in hand together?
Ignacio Mendez, CPA:
They Yeah, they play together very, very well. And, you know, that’s something that you know. Certainly, Miller Cooper does that, you know, for our clients. But, but the important thing here is identifying. You know, if you listen to what Nick and I said in the first phase was that it’s generally items that are 15 year and less in life that qualify for bonus appreciation. So I’ll play devil’s advocate in a minute. But generally speaking, you know, you buy, let’s say you buy an existing car wash, or you’re building a new car wash. You know, the question is, like, Okay, I spent whatever amount of money to buy this car wash. Well, it’s true, you bought the car wash or you built it, but you know, your total spend was, some of it was for land, some of it was for the structure itself, but another component is going to be the smaller pieces. And the way you determine that is. Engineers will typically come in and break down the car wash, the total spend, break it down into the smaller pieces with an eye of rate of determining what the lower live the smaller live assets are going to be. Specifically, we would be focusing on anything that’s less than 15 years computers, conveyors, you know, brushes, things like that. You know, those are things that that would qualify for bonus appreciation. But generally the cost segregation study, when, when one of one of those is done, it typically, they will give you a report and say, Okay, you spent X amount of dollars. We’re going to break these X dollars into y, z, A and B, because that’s your break it down into different categories so that you can take as much bonus depreciation as possible. Now, in not only in the car wash industry, but in every other industry, somebody would argue, well, you know, I don’t want to spend the money to do a cost segregation study, which, trust me, the money is worth the spend. Cost Segregation is pale, you know, the cost, there’s a, definitely a benefit to the cost, you know, relative to the tax savings that are, that are received. But there is an argument that some tax practitioners make that if you don’t do a cost segregation study, you could also put yourself at risk, because IRS could come in and say, well, listen, you you paid, I’m going to make a number of you paid a million dollars for this car wash, and you were supposed to take some of these items over five or seven years, and you dispose of the car wash in 10 years, you’ve now exceeded the life of the shorter lived assets. And guess what? You never took the depreciation you were supposed to. So the IRS will say there’s a concept called depreciation allowed or allowable, the fact that you dispose of the assets and you never took depreciation. The IRS could, you should have taken faster depreciation, and therefore you get zero. You missed out on it. You don’t get to go back and amend returns. You don’t get to claim that depreciation. So from a from a negative perspective, you could see the IRS making that argument. I will tell you, in the 25 years in practice, I’ve never seen the IRS make that argument, but they could, no, I think, I think you hit the nail on the head, right. Obviously, there’s a cost associated with getting a cost segregation study done, but you know, from what we’ve seen, it’s, it’s, it’s proved very beneficial to our clients, and especially like then you have some sort of support backed up by an engineer. You can make those, make those separations between the assets like Ignacio mentioned, take that bonus depreciation with support on the back end as well. So I will tell you that generally, the IRS says that when you’re buying a business and a car wash certainly would be a business the buyer and then the seller, assuming that you’re buying the assets or the partnership interest. That’s a special rule for a partnership interest, as opposed to a C Corp or an S corporation, but the the IRS basically says, when you’re buying a whole business, buyer and seller must agree on the purchase price allocation. So there will be a little friction there in that when, when somebody is going to sell a car wash, you know, they likely want to allocate more of the purchase price to the real estate as opposed to the equipment, because, you know, as a seller, you get better tax rates on the disposition of the real estate as opposed to the equipment. Conversely, if you’re on the buy side, you probably want to allocate more to the equipment and the real estate, because you get faster depreciation. The equipment is shorter lived, and you get bonus appreciation if you allocate to the the actual building, the real estate, then you might be stuck with 39 years. So there’s a natural friction between buyer and seller, and that’s why the IRS requires buyer and seller to agree on the purchase price allocation, and they generally, the IRS generally will not interfere in that purchase price allocation, because they realize that buyer and seller there’s a natural friction, and they have adverse, you know, desires in that transaction. So So generally, that’s something that you know. When you’re buying one when you’re buying a car wash, you should be mindful of the purchase price allocation. But aside from that, the build, if you’re building a car wash, you should be aware of all the rules related to bonus appreciation and whatnot. I should mention that, in addition to bonus appreciation, we live in an environment where we have enhanced section 179 so section 179 has been around, I think, since the 80s, where you basically the IRS, allows taxpayers to also deduct, on a quicker, on a quicker basis, short lived assets. There is a phase out after, I forget the number Nick. Do you remember the number like 1.5 now? I think, yeah, after one. $1.5 million it starts to phase out. But let’s assume you spend a million dollars on fixed assets, then you generally can expect you can expense that and take an immediate deduction. Now, section 179 has income limitations. You generally don’t want to do that if you have trust owners, because the trusts don’t get the benefit of section 179 expense. And then, but, but the other side. The other benefit to that is that many states, the states, don’t all conform to bonus depreciation expense. So as a result, you know, you may have no tax liability or very little tax liability at the federal level, but you will have a state tax liability if you take bonus and Nick. And I do this all the time. We’ll run an analysis on whether we believe bonus depreciation is better or section 179 is better, depending on the the ownership and the state profile, you know, one may be better than the other. So you know that needs to be considered.
Evan Roberts:
What documentation should, should operators investors really, really be keen on?
Ignacio Mendez, CPA:
I will tell you that if you hire a reputable and good shop that will do a cost segregation study, generally that that company, that provider, will gather the documentation to support how the base is and how it’s allocated, amounts of asset classes. So generally, it’ll be the purchase agreement, it’ll be the construction agreements. It’ll be the additional draws, you know, it’ll be all of the documentation. And then, you know, as the the IRS generally requires, you know, the general rule for tax purposes is that you must hold on to your tax records for seven years, with the exception of basis when, when you’re talking about basis and fix that assets, you generally must hold down to those until you dispose of the assets. If you later get audited and you can’t prove that you paid a million dollars for the for the building, then the IRS could say your basis should be zero. So it’s good form to hold on to all receipts related to the construction or the buy of any of any car wash or improvements, but generally speaking, that’s part of the process. And doing a cost segregation study, the service provider will gather all of that information and give you a report and say, Here you go. Here’s how we broke it down. Here’s the information we use. And that’s all delivered in a nice need package. Is the IRS paying closer attention to bonus appreciation and Cost Segregation studies right now? Is that something that something that’s, you know, on their radar more, or is it just kind of business as usual for
them? I think it’s business as usual.
Nick Paluch, CPA:
Yeah, I mean, again, it’s kind of the time value money thing, where it’s, it’s, it’s really just an acceleration. But I haven’t really had anybody come in and question whether, you know this asset should be 15 years or 39 years. Again, it’s entirely possible that it that it that could happen. But at the same time, if you go through the process of having a cost segregation study or something like that done, you have the support to back up your claims. And I think it would be extremely difficult for the service to come in and try to try to challenge something like that when you have all the backup for it again, that’s part of the part of the cost of the study in the first place, is giving you a little bit of assurance to say, hey, we can support this claim. If, if it ever came down to that, there’s one nuance, there’s one nuance that I want to raise awareness to. And, you know, I mentioned earlier that bonus appreciation has been around since 2001 it came it came about as an account of 911 you know, unfortunately, 25 years ago. But bonus appreciation has existed in one form or another over the last 25 years, with a variety of transition rules and different percentages, etc. And I will tell you that the audits that I have fought the IRS on generally, they focus on the date of contract. So when you have the date of contract or when the asset is placed in service, not so much on whether something it should be a seven or a 15 or a 39 year life. I haven’t had much debate there, but because we have had transition rules over the years where, if you placed it, if I remember correctly, back in Oh 303, was a year where, I think may 5 of all three, prior to that, it was 30% bonus. After that, it was 50% bonus. You know, you got into the base as to when the assets were actually placed in service. I had a client, publicly traded client, that got audited. They had a facility in Wisconsin and and they got audited. The IRS was asserting that the asset was not placed in service in the right year. And we had to go through that fight to prove to them that it was placed in service in the right period to qualify for. In my case, 50% in the present case, on a kind of the OBB. We have to be mindful of the fact that there is a transition period that the 100% bonus appreciation came into effect on January 19 of 2025 so if you if you have a binding contract to build.
Ignacio Mendez, CPA:
So you know, a a car wash after January 19 to 2025 where you, in fact, bought one after January 19 of 2025 that’s not a concern. But as you know, car washes are not you can’t put one up in a marrow weeks. It’s gonna take months. So if you, if you have a contract that started in 2024 or early, really early in 2025 it’s possible that at least part of those additions will not qualify for 100% bonus and will be stuck with the 40% bonus. Not now, again, beyond the scope of probably this discussion. But there are transitions, there’s elections, there’s de minimis rules, there’s other things that you need to look at, and you really got to look at the contract. The contract, the binding contract rule, basically says, Do you have the right, do you have an out, a contractual obligation, to go through with the with the project, without having a substantial amount of penalties? If that doesn’t exist, maybe you can make an argument that you placed it in service, or you actually started construction, was after January 19 of 2025 so it’s not black and white, but, you know, certainly facts and circumstances. So my point is, you asked, you know, are there debates? There are debates with the IRS, but it mostly has to do with the dates that you place in service, not so much with, you know, arguing the lives I want to dig into the 1031 exchanges recapture and exits. You know, how do bonus appreciation and 1031 exchanges interact in practice? Yeah.
Nick Paluch, CPA:
So as far as, like, a 1031 exchange, you know, they change the rules on, on what you can use that for, geez, maybe five years ago now, at least. So basically, the way that that works is, when you’re rolling over basis selling a building into a new building, there’s opportunities for additional depreciation there in excess of what your sales price is. So for example, if you had a building that you were selling for a million dollars. You bought a new building for $2 million you have $1 million of additional spend. There’s some rules with you. Have to keep track of your original basis and things like that. But basically, like your additional spend, in addition additional spend above what your sales price is, can kind of go through the same situation as if you were buying a building new so in that case, again, it’s more of a timing thing. So you’re kicking the can down the road on the gain of the original sale. But any additional spend in excess of your sales price, you can go through the same the same situation and scenarios in order to accelerate some more depreciation there.
Evan Roberts:
Looking ahead, obviously, you know, with the current landscape that with the big, beautiful Bill keeping this trend going within bonus depreciation, you know, how should operators be planning today if their business model depends heavily on tax driven cash flow?
Ignacio Mendez, CPA:
Yeah, I think, I think that’s a good point. I think not not only for car washes, but some of our other clients that are capital intensive. Capital intensive. I will tell you that if you asked me a year ago, you know, 14 months ago, when we’re doing year end tax planning for 2024 we were looking down the barrel of potentially increasing tax rates. You know, we had this, this thing, this qbi qualified business income deduction that basically lowers the the effective tax rate, assuming you have salaries, that it basically lowers the effective tax rate to about 29.6% for a pass through energy okay, if you, if you then look, look at what was going to happen with the expiration of the Cares Act, that qbi deduction was going to bring the tax rate by eliminating the qbi, it was going to bring the tax rates back to 37% so we were in a situation where from one year to the next, the tax rate was going to increase about 8% so we had the debate a year ago with our clients saying, Okay, we have these assets that we can take bonus depreciation and save money at the rate of 27.8% or 2027 27 29.6% we can save tax at 29.6% or we can save the deduction for future years when they’re going to be worth 37% of deductions. Right? That was a live debate that we had most of our clients, I will tell you, they don’t really care about rate arbitrage. They care about deductions today. So the fact that they, you know, a million dollar deduction was going to save you 296,000 and the next, over the next, you know, 15 years, it was going to save them 370,000 they didn’t care. They generally want to take the tax deduction today. Another element of the BBB, the old BBB, was that it made at least under today’s regime, it made that qbi deduction permanent, so we no longer, at least as of today, we are not having to kind of toggle, when do we have the most benefit on a tax rate? For bonus depreciation, because for the foreseeable future, we will continue to be in a 29.6 highest marginal tax rate, not 37 again. If the administration changes in a couple, in two, three years, maybe we might have a reversal of tax rates. I don’t know. We can only plan with what we know. But at least as of today, you know the tax rates are static. And, you know, we’re back in a day where we’re trying to generate as much deductions as we can. You know, if I advise my clients is, you know, don’t be penny wise and pound foolish, right? The structure, how you structure your entity from the very beginning is very, very important, whether it’s a pass through entity, what kind of pass through entity, who the owners are going to be. Do you have a vision of taking external investors in you know, that may dictate a different type of entity, and make sure that you have your documentation in line with respect to how you’re going to operate, you know, and buy fixed assets. I think that that, you know, get your accounting records straight, because the number one audit risk, I would say, is when you have sloppy records, that generally is what’s going to dictate whether or not you’re going to have a successful outcome with the IRS. And nowadays, I will tell you that you know the IRS. You know depends on what you believe is, we for sure, are seeing less audits than we have been in the past. They just, they’re strapped for resources. But I’m convinced that they will be back. They will be back, and they’ll be looking at, you know, some some of these, some of these strategies, and they’ll be looking at some of these rules. So I don’t, I don’t think it’s a free lunch right now, but I think just get your house in order. Make sure that you file your 1090, nines, make sure that you that you you have your basis records, make sure that you have accounting records tight. And then hire a competent tax person. I think ultimately that that’s what’s going to drive, you know, success. And so I think that if you hire somebody who is knowledgeable in the space and can can advise you on two things. One, tax minimization strategies as it relates to operations. You know, that’s one thing. But then also be a strong advocate for you when, when it comes to the exit, you know, how are you going to posture the company for exit and maximize after tax dollars? I think that’s, that’s where you can you should spend your efforts.
No, I think, I think Ignacio hit the nail on the head there. I mean, it’s not so much again, like thinking about bonus depreciation. It’s, it’s, it’s not necessarily that, in and of itself, is not any sort of risk or controversial thing. It’s basically just being able to defend what you’re doing and keeping good records. And that’s, you know, something that we, we try to preach to everybody, is make sure that you can support what you’re doing, and as long as you’re able to do that, like should be able to hold up should anything arise. The one thing that I often, I guess, scare my clients with is that, you know, unlike every any other area of law, where you’re innocent until proven guilty, in the area of tax law, you’re guilty until proven innocent. So when the IRS comes or a taxing body comes in audits, you they assume that you did it incorrectly, and the burden of proof to show that you did it correctly is on the taxpayer. So any position, you know, any position, any deduction, whether it’s you know, meals and entertainment, whether it’s depreciation, whether it’s salaries, the burden is on a taxpayer to prove that they did it right. So generally, when I tell my clients that they they find religion and they, okay, fine, I got to pay attention to this.
Evan Roberts:
You know, obviously it’s really hard to predict the future in any case, right, any industry. But with, with the tax laws changing and administration’s changing. What do you guys kind of predict or see happening in the next four to five years in the tax strategy space?
Ignacio Mendez, CPA:
So you’re right. I mean, it’s hard for us, and you know, the question is not a difficult one, because our clients are asking this all the time. Look in the crystal ball, what’s going to happen? What do I do with my business? I will tell you for the next couple years, two, three years, I expect a somewhat steady state and static, you know, tax environment. So I don’t think there’s, there’s much, much change that I foresee coming during this administration. I don’t know what happens, you know, at the next election cycle, but generally speaking, you know, tax is not exactly a fast moving environment, so you know, and when it is going to change. Generally, we’ve seen this before. We’ve had administration changes. We’d have major tax law changes. We’ve been able to pivot. We’ve been able to pivot and make sure that that we’re ahead of those changes. The tax law changes generally, you know, if they’re good, they will make them retroactive. But if they are not good, they are generally they you know, in arrears, they will say, beware, next year or next year, the following is going to happen. It does give us the opportunity to kind of pivot and and do things proactively to try to. You know, make sure that we stay ahead for investors and taxpayers. But generally, if it’s a good thing, like the old BBB, generally, they will make that retroactive to stimulate the economy. And you know, generally, when it’s a good thing like that, they will make it retroactive. But aside from that, I think it’s going to be pretty steady for the next few years.
Nick Paluch, CPA:
Yeah. I mean, I think Ignacio has kind of hammered this home, too. But these, these changes are permanent. Everything’s permanent until it’s not, you know, it’s just, it’s hard to tell what can happen in the future. But at least in this case, we should have, at least, you know, through three, probably two or three more years of of consistency. And a lot of these changes in the big, beautiful bill are very favorable to business owners. So the, you know, the next three years should, should be pretty
good, awesome. Well, I can’t thank you guys enough for coming on. I really appreciate it. A lot of great insight and a lot of good, you know, great advice for operators or investors. Really appreciate your time.
Thank you for the opportunity, thank you.