Cost Segregation Your Competitive Advantage – Specifically for the Medical Practice
The medical industry is dealing with some significant obstacles right now with the regulations of the past years. Fortunately, there still does exist a legitimate investment strategy, fully supported and validated by Congress, which the Treasury Department states should be considered for every taxpayer who owns or is constructing, renovating, acquiring or even leasing a commercial property. This often overlooked and misunderstood opportunity is available now utilizing a unique IRS approved tax program called Cost Segregation.
Cost-Segregation studies allow taxpayers to write off a much greater percentage of their buildings (and tenant improvements) over a shorter time period. More specifically, the IRS code (Rev. Proc. 96-13, Rev. Proc. 2002-19, 2004-11) is designed to encourage business investment, by allowing building owners to reallocate Real property to Personal property, which increases depreciation deductions, thereby reducing the owner’s tax burden and increasing cash flow.
“In some cases, rather than renting space, a business owner may purchase the buildings in which they operate their companies.
Many CPA s who work with these types of business owners feel their clients are passive investors and cannot take advantage of cost segregation. In reality, many of these property owners can benefit from cost segregation tax savings if the accountant knows what to look for.”
Utilized properly by the Medical Industry, the (Fully Engineered and Accounted Cost Segregation Analysis Study) employed by cost-segregation specialists can be vital to a business owner’s bottom line. It allows the taxpayer to reclassify as much as 25 percent to 50 percent of a medical building into the shorter-lived personal property asset classes than traditional “accounting method” used by CPA firms. Just when you thought it couldn’t get better there can be additional benefits found in “looking back” in the past to reclaim unrecognized depreciation deductions. Amended tax returns are not required; instead, a “catch-up” depreciation can be taken in one year by filing IRS Federal Form 3115 Change in Accounting Method, with IRS consent granted automatically.
HOW THE TECHNIQUE WORKS
The process of cost segregation begins at the time of purchase or construction. Accounting professionals should advise clients or employers buying real estate to use an engineering report to segregate assets into four categories:
Buildings (which should be further broken down into component parts)
Each of these categories has a unique depreciation recovery period under the Modified Accelerated Cost Recovery System (MACRS). The IRS rulings and court cases support the idea that systems which directly serve equipment that qualifies for accelerated depreciation, also qualifies for accelerated treatment. The proper documentation using the engineering approach is required to justify what is claimed.
Example of a fully engineered cost segregation applied to a medical building:
Medical Building Value $1,580,000
Cost Segregation Tax Savings $553,000
Net Cash Benefit to Owners $193,550
Most CPA s and accountants are familiar with MACRS but may not be aware of the benefits of a full engineering based study. Also they typically do not have the experienced manpower needed to perform an engineering based examination of the medical building. In order to properly classify the items within the building, an engineering-based segregation by qualified individuals is required to create an in-depth analysis. These individuals need to be skilled in engineering, construction and taxation for the purpose of identifying the individual building assets, their associated costs and appropriate recovery period classification for federal, state and property taxation.
The Journal of Tax Accountancy has stated that …without a doubt, a cost segregation study is among the most valuable tax strategies available to owners of commercial real estate. The sooner the medical community becomes educated; the sooner owners can begin to realize substantial increases in cash flow, which in turn encourages additional business spending and investment.