you can greatly accelerate your annual depreciation and reduce your tax liability, generating immediate cash flow. In addition, cost segregation allows easier write-offs when an asset becomes obsolete, broken or destroyed.
The key to cost segregation is viewing a real estate acquisition as consisting not only of land and buildings, but also tangible personal property and land improvements. The process of cost segregation begins with a formal engineering report at the time of property purchase that segregates assets into four categories, identifying any assets that qualify for a shorter depreciable life:
• Personal property. This category typically includes non-structural elements such as furniture, wall coverings, fixtures and window treatments, and can be depreciated over five, seven or 15 years.
• Land improvements. Typically including items such as sidewalks, fences and significant landscaping, this category is subject to accelerated depreciation over 15 years, generating useful tax savings.
• The building. The engineering report will assign separate values to various components of the building so that if a component (such as the roof) subsequently becomes worthless, you can write it off immediately.
• Land. Whatever amount of the purchase price is not accounted for in the first three categories is allocated to land, which generally has a low or insignificant value and therefore will not generate significant tax savings.
With various tax incentives available for small businesses, there are a number of ways you can maximize the investment in your practice design through tax deduction and depreciation strategies.
A taxpayer can use cost segregation when constructing a new building or buying an existing one. In addition, even if you have owned your building for several years, you may be able to “catch-up” during the current year all of the depreciation you could have taken in prior years.
One of the trickier aspects of cost segregation is the actual categorization of property and distinguishing between tangible personal property and a building’s structural components. Your CPA will play a central role in making these distinctions and guiding you through the cost segregation process.
The cost of the engineering study that forms the basis for cost segregation can appear daunting, but the advantages in tax savings far outweigh the initial investment. In the typical dental practice, for instance, assets that qualify for accelerated depreciation can range from 20 to 35 percent of the total building cost. The tax savings this represents can offset the costs of owning or constructing your building, providing greater leverage when designing your dream practice.
Take Advantage of Section 179 Deduction
The Internal Revenue Service provides a significant tax benefit to small businesses that reinvest through equipment purchases, leases or financing. Under Section 179 of the Internal Revenue Code, you may be able to write off the entire cost of an equipment purchase in the year it is purchased, instead of depreciating it over many years.
• Sole proprietors, partnerships and corporations can deduct the full cost of equipment and furniture — up to the current tax year’s annual maximum.
• Business-related property purchased during the calendar year typically qualifies for the Section 179 deduction, and can include:
° Tangible personal property such as office furniture, equipment, and computers
° Property contained in or attached to a building (other than structural components), such as counters and signs
° Certain off-the-shelf computer software
• It does not matter if you have not yet paid for the purchase. You simply need to put the equipment into service before the end of the calendar year to claim the Section 179 deduction.
The Internal Revenue Service provides a significant tax benefit to small businesses that reinvest through equipment purchases, leases or financing.
Summary
Once you have taken the significant step of starting your financial plan, pat yourself on the back! Financial planning is one of the more complex aspects of any practice construction, expansion or remodel project and requires considerable discipline to paint a thorough portrait of your financial status and needs. Whether you are just starting to work on improving your financial profile or have funding in hand, you have demonstrated determination in moving your project forward and are ready to implement your vision of a new, functional and contemporary dental office design.
Contributor Biography
Wells Fargo Practice Finance is the only practice lender selected especially for ADA® members and endorsed by ADA Business ResourcesSM. With more than 25 years of experience helping dentists transition to ownership and manage growth, they understand the business of growing successful practices and provide customized financing, complimentary planning resources, and personalized support to help dentists acquire, start, expand, and refinance their practices. They can be reached at 1.888.937.2321 or https://practicefinance.wellsfargo.com/dentists.
1 “Turning Point? U.S. Commercial-Property Sales Plunge in February.” Wall Street Journal. Available at http://www.wsj.com/articles/turning-point-u-s-commercial-property-sales-plunge-in-february-1458639002. Accessed May 16, 2016.
Chapter 3:
Location Selection and Siting Concerns
Chapter 3:
Location Selection and Siting Concerns
By John Adams, A.I.A.
LEARNING OBJECTIVES
Evaluate potential properties for their suitableness for a new dental office
Identify common pitfalls if selecting a rental space or a property to purchase
Gain control of unexpected site development costs
Navigate through the various aspects of a proper due diligence process
Prepare materials to meet with the city or county for permit pre-application guidance
This chapter aims to help you with due diligence in looking at a property and identifying issues that can be obscure or costly. Proper due diligence can go a long way to averting a big mistake in land acquisition or taking on a lease of property that has hidden deficiencies.
A FEW PROPERTY DEVELOPMENT TERMS
Some jargon is inevitable when talking with real estate professionals or city officials. Here are some key terms:
Site: A property where you propose to develop or build your project. It could be empty land or have an existing building. Think of it as shorthand for “project site.”
Leasehold Improvement or Tenant Improvement: A remodel or improvement of an existing building for the benefit of the tenant. Tenant improvements are largely interior work but adding new entry doors or windows to the exterior is common.
Use: In real estate and permitting jargon, “use” refers to the type of entity or activity the location contains (e.g., dental office, retail store, apartment, etc.). Use is determined by local code officials.
Zoning: