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How to Lower Your Taxes on Practice Construction, Renovation

Here’s a way to save tens of thousands of dollars on a new build or renovation of a dental practice: the cost segregation study. Instead of writing off construction costs over 39 years, qualifying construction might be written off over five, seven, or 15 years. Make sure your CPA knows how this key savings opportunity works.
Art Wiederman, CPA
PUBLISHED: Thursday, April 13, 2017

Now let’s assume Dr. Jones built the exact same building in 1999 and has filed tax returns through 2016. Federal tax law states that he can have a study done for his 2017 returns, file the proper paperwork with the IRS, and make a retroactive adjustment to his tax return, called a Section 481(a) adjustment. In 2017, he can take a one-time deduction based on the difference between the depreciation he would have taken had he done the study in 1999 and the amount he has taken without the study.

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In this case, had he done the study in 1999, he would by this time have taken all of the depreciation on the five-year property of $306,930; on the seven-year property of $83,927; on the 15-year property of $173,233; and seventeen-thirty-ninths of the $1,435,910 taken over 39 years on the structure, which comes to $625,909. So the total amount of depreciation using the cost segregation study numbers is $1,189,999.
Without the study, he has taken depreciation of seventeen-thirty-ninths multiplied by $2 million, which is $871,795.  So the difference between the $1,189,999 and the $871,795 is the one-time deduction, which comes to $318,204. At a 40 percent marginal tax rate, that is a one-time savings of $127,282.

If you are planning on building a new office, whether it includes the purchase of a building or not, or if you have built one anytime after 1987 and did not do a study, the implementation of a study can save you tens of thousands of tax dollars.
It is important that you use a company that specializes in performing engineered cost segregation studies. In addition, you have until the due date of your tax return including extensions to have the study prepared plus file the required IRS form, Form 3115. 
Finally, if you generate the large depreciation deduction, which throws your Schedule E (this is the form on your personal tax return that will be filed if you own the building in a single-member LLC) into a loss for the year, it is very important that your CPA makes what is called a “grouping election” pursuant to Treasury Regulation Section 1.469-4 on your corporate tax return and on your personal return. This avoids what is called the passive activity loss rules, which would disallow the loss created from the depreciation deduction created by the cost segregation study.  
Be sure to consult your tax professional about this as the rules are very complex.  
Art Wiederman is a CPA and managing partner of Wiederman and Chamberlain, a CPA firm that works with about 250 dentists in Tustin, California. He is a frequent lecturer at local, state and national dental meetings and is a founding member of the Academy of Dental CPAs (ADCPA), which comprises 26 dental CPA firms across the country, servicing more than 9,000 dentists. 

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