I recently received a call from a CPA with questions about oil service buildings and their tax treatment. There’s a common misconception that these buildings are 100% deductible, but that’s not entirely accurate. Many commercial real estate brokers market the supposed automatic bonus depreciation benefits of these properties, but the reality is more complex. Unlike convenience stores (C-stores) or tunnel car washes, oil service buildings face more challenging qualifications in order to claim it all as 15 year class life. We have not heard that the IRS is scrutinizing how owners are depreciating these buildings, but it would seem to be a pretty easy target given the assumptions many in the industry make about oil services buildings.
Understanding the Classification Nuances
Let’s start with the fact that commercial property is considered 39 year class life property meaning you get to depreciate it over 39 years. That amounts to 2.5% of the building cost per year is taken as a deduction (1/39). Oil service buildings might be able to be identified as 15 year class life and thus eligible for bonus depreciation. Bonus depreciation used to be 100% from Sept. 27, 2017 – Dec. 31, 2022. The law has it declining 20% each year until it is zeroed out by 2027. For 2024, bonus depreciation was 60%. (Congress will be considering reupping the Tax Cuts and Jobs Act which would bring back 100% bonus depreciation, but we won’t know that until later this year in 2025). Properly classifying oil service buildings under the 15-year class life rule isn’t as straightforward as it is for C-stores or tunnel car washes. Owners and their tax advisors should thoroughly understand the rules and ensure proper documentation to avoid potential IRS challenges.
For oil service buildings, the critical qualification is that 50% or more of the revenue must come specifically from petroleum sales. Oil of course is petroleum but the labor to change the oil is not. Oil service shops sell other services and products that further make it difficult to achieve that 50% petroleum sales threshold. It’s not uncommon to see these shops selling other fluids, filters, wiper blades etc. Brands such as Jiffy Lube are expanding beyond oil changes to provide other services. This seems like a smart move for the brand to capture more of the expenses Americans have with maintaining their cars. Jiffy Lube now has these beautiful, larger, modern MultiCare buildings. No doubt this is good for business but just note it’s likely going to make it very difficult to achieve that 50% petroleum sales qualification to claim the entire building as 15 year class life.
Claiming Depreciation: When It Works and When It Doesn’t
If an oil service building meets the qualifications, tax advisors can claim the entire property under the 15-year class life and apply the appropriate bonus depreciation. For example, if a $2.5 million building (with $500,000 allocated to land) was placed in service in 2024, the owner could claim 60% bonus depreciation on the $2 million building value, resulting in a $1.2 million deduction. This approach avoids the need for a cost segregation study.
However, if there’s any uncertainty in meeting the 50% revenue threshold and proving it with documentation, then conducting a cost segregation study is a likely a wise investment.
Why Cost Segregation Makes Sense
If you cannot achieve that 50% petroleum sales criteria, then a cost segregation study will almost always make sense. Oil service and multicare auto service buildings have a lot of 5 year and 15 year class life property. You should identify this property to maximize your deprecation. It’s also helpful to have this segmented in the event you have to replace some of this property over the normal course of operations of your business. It makes dispositions much easier which again will help you save money on your taxes. a cost segregation study can still provide substantial benefits. Many of these buildings will see 30, 35, 40% of the overall cost of the building reclassified to 5 and 15 year life providing the owner with a significant deduction in the year in which the cost segregation study is applied.
Looking ahead to buildings placed into service in 2025, bonus depreciation will be 40% unless Congress enacts changes. If lawmakers restore 100% bonus depreciation, property owners may be tempted to skip a study and claim 100% depreciation on these oil service buildings. At the end of the day, that’s a call that’s up to the owner and his/her advisors. We get a chance to evaluate a lot of these buildings as you might imagine. Most of the buildings do not hit the 50% threshold. It’s not us making that determination to try to get a study out of the owner. This analysis is done by the owner / operator and tax advisor and they usually can’t confidently say they hit 50%.
Avoiding Costly Mistakes
Incorrect depreciation claims can have serious consequences, and if the IRS decides to target owners of oil service buildings, they would be easy targets. If you own a building or if you are a tax advisor who has a client who owns one of these buildings, if they can’t confidently document that they hit the 50% petroleum sales qualification, then do the smart thing and have a cost segregation study done. You’ll sleep better at night knowing that you have the proper documentation and classifications of your building backed up by an experienced third-party cost segregation company.
The Bottom Line
If you want peace of mind and confidence in your depreciation strategy, a cost segregation study is a valuable tool. The cost of the study is minimal compared to the potential savings and security it provides. Don’t take unnecessary risks—ensure you’re depreciating your oil service building correctly to maximize your depreciation and tax benefits while complying with the law.
