If someone were to tell you there are thousands of dollars hidden somewhere in your building, would you look for it? Medical practices are prime candidates for a cost segregation study, which can save thousands in taxes.
If someone were to tell you there are thousands of dollars hidden somewhere in your building, would you look for it? Thanks to numerous IRS rulings, procedures and court cases, a cost segregation study can help you find it.
What is a cost segregation study?
For tax purposes, anything physically associated with a commercial building is depreciated over 39 years. A cost segregation study breaks out the components of a building, identifying personal property, indirect costs and land improvements that can be depreciated over a shorter period of time, such as 5, 7, or 15 years, allowing accelerated depreciation of those assets.
Typical examples of separate components are parking lots and landscaping (15 years), cabinets (5 or 7 years) and interior doors (5 or 7 years). Although those may all sound obvious, the types of items that can be broken out are numerous and often not easily identifiable.
The main benefit of a cost segregation study is the increase in cash flow due to the additional depreciation expense realized in the first 5 to 15 years. The reduction in income taxes caused by the additional depreciation expense in the early years results in actual cash savings.
Cost segregation defers taxesâ€•it doesn’t eliminate themâ€•but most business owners would rather take a deduction today as opposed to 20, 30, or 40 years from now. Additional tax savings can result in taking the additional depreciation in high tax bracket years (many physicians have combined federal and state effective tax rates nearing or more than 50%) versus lower tax brackets in future years, for example, in early retirement.
Cost segregation candidates
There are 3 prime candidates for a cost segregation study. The first and most apparent candidate is a newly constructed property. Equally as good, but not as obvious, is an already existing, recently purchased building. A building does not have to be new to take advantage of a cost segregation study, but it does need to be new to you.
The final prime candidate is a building that has undergone a major renovation. Major renovations have gained substantial benefits due to recently released repair and capitalization regulations. Building purchases or substantial improvements made within the last few years can also be good cost segregation candidates as there are still ways to capture the federal and state tax benefits that a formal cost segregation study provides.
Another important consideration in determining if you are a candidate is the cost of the building or improvement. We have found through experience that approximately $1 million of cost for the building or improvement is necessary to make a cost segregation study worthwhile. The cost point could be less if the building is highly specialized.
All buildings are not created equal. Some buildings are just inherently better candidates for cost segregation studies than others. Generally, the more specialized a building, the more likely components will be eligible for accelerated depreciation.
Medical practices are a great example of this.
If you think about typical doctors’ offices, they are generally very specialized. There is typically a large amount of cabinet and counter space, as well as specialized equipment that requires particular electrical, water, or structural components. This usually makes medical offices strong candidates for a cost segregation study. One cost segregation study for a physician who recently built his own building for about $1.5 million resulted in estimated tax savings of $90,600.
Often some of the specialized features that provide large benefits aren’t easily identified by the untrained observer. The best thing to do if you are unsure of your building’s candidacy is to ask. Generally, a quick visit to the facility is all a cost segregation specialist will need to help you determine if a cost segregation study would be beneficial.
Once a building is qualified as a good cost segregation candidate, it is important to review the building owner’s tax situation to ensure that the additional benefits of the cost segregation study can be utilized on the owner’s tax return. A team approach between the cost segregation specialist and the owner’s tax advisers can lead to a seamless project that maximizes the total tax benefit available.
Neil Keller is the partner—in-charge of the tax department for the Milwaukee office of Sikich LLP. Mr. Keller works with Sikich clients to identify and understand their cost segregation needs and then facilitates the cost segregation project to simplify the process for the building owner. Keith Kamperschroer is an accounting partner for the Milwaukee office of Sikich LLP servicing healthcare clients and is a certified Healthcare Compliance Consultant. Mr. Keller, firstname.lastname@example.org, and Mr. Kamperschroer, email@example.com, can be contacted by email or (262) 754-9400.
Sikich LLP is also a proud member of the National CPA Health Care Advisors Association (HCAA). HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at firstname.lastname@example.org or visit www.hcaa.com.