Dentists are turning to cost segregation as a means to tap cash flow from their dental practice. More and more dental professionals realize how easy the process is to take advantage of their dental office when cash flow is tight. Dentists, like other medical professionals, are affected by the ebb and flow of our economy. As more people move from job to job there are less who have dental insurance because they don’t see the need. No dental insurance means there are fewer people getting their six-month check-ups. Children aren’t getting braces. Of course, this all translates to less income.
To add insult to injury, many of those patients who do come in are cash payers seeking huge discounts, again, due to the lack of insurance.
For those who have dental insurance, the dentist knows the collection process may take weeks or months before getting paid. Again, that puts you, the dental professional, in a tight cash position many times. It makes you feel like a bank or credit union with customers behind on their payments.
The answer many dentists are turning to today is cost segregation. Cost segregation is the process of identifying building components that are considered “tangible personal property” or “land improvements” under the federal tax code. This method of depreciation is called Modified Accelerated Cost Recovery System (MACRS). The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property). If the property is a leasehold (or tenant) improvement, depending upon the lease date, it’s depreciable life is 15 years rather than 39.
Tangible personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building. Examples would include your dental operatory, lab, x-ray, dental sinks, specialty plumbing, secondary lighting, specialty electrical, cabinetry, security system, cable/internet system, and more.
Land Improvements generally include items located outside a building that are affixed to the land and do not relate to the overall operation and maintenance of a building. Examples would include signage, landscaping, sidewalks, curb, parking, drainage, fencing, and much more.
Cost segregation-reduced tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow. Cost segregation also reduces real estate taxes, use taxes, and property insurance premiums. The reason is simple – personal property is assessed at a lower tax rate than real property.
So, when dentists use cost segregation to accelerate depreciation on their facility, they effectively receive a tax-free raise in income. Tax-free because it is actually a tax credit or tax refund, depending on how you want to take it. Here’s an example: Let’s say you are a new dentist with a new practice. You have 1,200 square feet as a tenant in a mixed-use retail complex. You spent $100,000 to complete the build-out. Yes, this is a small example, but it’s a reality for many dentists just starting out. Cost segregation would typically reclassify about 40% of a dental office. Therefore, $40,000 would be accelerated into the 5-year tax life. If you are in the 37% federal tax bracket that would give you $14,800 in income tax credits. A cost segregation study of this size would cost about $3,000 depending on the specifics. Would you invest $3,000 to receive $14,800?
If you are a seasoned dentist who owns your own building and invested $1.5 million, for example, your benefit is much more. A well-designed and attractive dental office will normally realize 45% to 55% in accelerated depreciation. At 45%, you would realize an additional $256,250 in income tax credits. If you have owned your building 5 to 7 years or so, you could qualify to receive about 50% of this as an income tax refund in the current tax year. Of course, your personal tax situation will impact your savings. (Always consult with your CPA or tax attorney as how best to apply the results of a cost segregation study.)
If you, as the DDS, DMD, or any other dental professional want to learn more about applying cost segregation to your specific circumstance; contact us. We provide a free benchmark analysis of your facility detailing the short life assets and how you will specifically benefit.
Cost segregation works every time it’s applied.
Contributed by Jeffrey M. Hobbs, Director