North Texas Dentistry Volume 9 Issue 3 2019 ISSUE 3 DE - Page 18

money matters DENTISTS USE COST SEGREGATION FOR CASH FLOW by Jeffrey M. Hobbs entists 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 advan- tage 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 less people getting their six-month check-ups. Children aren’t get- ting braces. Of course, this all translates to less income. D 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 col- lection 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 segrega- tion. Cost segregation is the process of identifying building com- ponents 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 depreci- 18 NORTH TEXAS DENTISTRY | ated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property). If the prop- erty 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, spe- cialty electrical, cabinetry, security system, cable/internet sys- tem, 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 depre- ciation 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 - per- sonal property is assessed at a lower tax rate than real property. So, when dentists use cost segregation to accelerate deprecia- tion 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