Cost segregation may not be the first thing dental practice owners think about when it comes to running a profitable, cost-efficient business. However, if you built or purchased your building, maybe it should be. Among other tax reform changes affecting dentists, there are new opportunities for valuable tax savings under depreciation through cost segregation studies.
As I outlined in a previous blog, How Cost Segregation Can Save You Money, cost segregation is an IRS-approved, highly specialized accounting cost analysis of new or existing commercial real estate to maximize depreciation deductions for federal and state income tax purposes. A cost segregation analysis allows taxpayers to reclassify assets into shorter class lives to accelerate deductions and create improved cash flow.
While the media has widely covered other aspects of tax reform, there are also new opportunities for additional tax savings via cost segregation. Unfortunately, too many dentists miss out on significant tax savings by not understanding and/or implanting cost segregation studies.
Bonus Depreciation Enhancements Under Tax Reform
As part of a stimulus measure, Congress implemented bonus depreciation in 2001 to allow taxpayers to write off a portion of an eligible asset the year it was acquired. The measure was limited to new property – mostly for assets with a life of fewer than 20 years – and was equal to 50 percent of the eligible asset. The Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100 percent of assets acquired after Sept. 27, 2017, a tremendous boost to taxpayers. Additionally, Congress expanded bonus depreciation eligibility to include used property.
What Do the Changes Mean to Dentists?
The costs you incur to acquire, construct or expand a dental facility can be considerable. If you acquired property for your practice after Sept. 27, 2017, the value of a cost segregation study could potentially double your tax savings, and the value can be even higher for used property. Obviously, the higher the cost of your building, the higher the tax benefit. The cost savings gained through these deductions can be used to fund your retirement plan, for future expansion or to update office equipment, among other improvements.
How Does a Cost Segregation Study Work?
A cost segregation study will provide a comprehensive analysis of your investment in a newly constructed or existing facility. According to IRS guidelines, the study must classify assets into property classes, such as land, land improvements, building, equipment and even furniture and fixtures. Typically, cost segregation specialists will work with general contractors and architects to study site plans and blueprints and then analyze cost data. The deliverable to you is a detailed report listing assets with the applied tax depreciation method.
If you have plans to acquire a new building, renovate or expand your existing site, or purchase an existing property, you have the opportunity to create immediate cash savings and improve your cash flow. Other benefits include estate planning advantages and insurance cost savings.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.