Bruce Bryen, CPA. Managing Partner The Snyder Group, LLC Printer Friendly Version

Accelerating Real Estate Deductions

The following article is about the advantages of a little-known method of accelerating the tax write-offs for real estate.

With the economic slowdown we are experiencing, many dental practices are not generating the same cash flow that was available just a few years ago. Those with real estate are finding the values dropping and financing efforts more difficult.

The practicing dentist may spend time with his or her advisors analyzing the dental practice for ideas to improve cash flow. A good CPA who works with dentists can give input into better business procedures and tax strategies for improving the practice’s cash flow. During the year, questions will arise about the acquisition of equipment and its depreciation write-off and what that does for operational increases in money flow. Some dentists acquire equipment because of the fast allowance granted by the government for wear and tear allocated to it. Financing is usually available from the dental supply house or other lenders because of its secured nature. The tax write-off from the equipment purchase creates an immediate source of cash flow by reducing the current tax burden for the dentist. In addition, if financing is part of the acquisition, payments may not have to be made for months, which also increases the flow of funds to the practice.

An area of interest for the dentist that is not well known by advisors is a quick method of depreciation for real estate that, like equipment, can create immediate cash flow by the use of an accelerated method of depreciation. Commercial real estate is normally allowed a depreciation term of thirty-nine years. (Residential real estate can be depreciated over a twenty-seven-and-one-half year term.) Discounting the land, that means that for a commercial dental office with a price of $780,000, the annual depreciation is $20,000 ($780,000 ÷ 39 years). There is a method of depreciation known as cost segregation depreciation that allows the depreciation to be taken over the life of those individual items that compose the real estate’s construction rather than the total cost of the building as a whole. As an example, the heating and air conditioning units have a specific cost and estimated useful life that is different from the composite building’s life. Partitioning walls for individual offices, rugs, glass inside the building, plumbing fixtures and kitchen areas and appliances all have useful lives that are less than the footprint of the building. If the $780,000 cost of improvements were to have an allocation of $680,000 for items with estimated useful lives of ten years, as an example, that amount ($680,000 ÷ 10 years) would generate a $68,000 depreciation deduction plus the balance of the $780,000 minus $680,000 ($100,000) ÷ 39 years of depreciation, which would generate an additional $2,564 of depreciation ($100,000 ÷ 39 years). The dentist with the real estate would now have a $70,564 write-off ($68,000 + $2,564) instead of $20,000 ($780,000 ÷ 39 years). Assuming federal and state income taxes at a 40% rate, the dentist generated cash through tax savings of $28,226 ($70,564 x 40%) minus the normal savings of $8,000 ($780,000 ÷ 39 years x 40%), for an additional $20,226 per year for ten years..

By accelerating your real estate deductions through the use of quick depreciation, you will have increased your cash flow by $202,260.

What use do you have for these additional funds now? Do you pay down more expensive debt, invest at today’s low market prices or contribute to the dental practice’s retirement plan, which you could not afford to do without this new source of cash?

Of course the depreciation cumulative total is the same for the building no matter what method you choose. The advantage of the cost segregation depreciation concept is the use of the present value of the funds and the sources available for use of those funds. Having the money available over ten years rather than thirty-nine years creates a faster generation of cash. Those who have a need for additional funds should learn more about cost segregation depreciation and the concept of the present value of the use of funds.

For more information about the advantages and disadvantages of using cost segregation depreciation, please contact the author at The Snyder Group, LLC.

Bruce Bryen, CPA has successfully assisted dentists with their personal and financial matters for more than thirty years. As a partner in The Snyder Group, he delivers creative and prudent financial strategies to help dentists build and protect wealth at every stage of their careers. His extensive expertise includes financing, debt restructuring, retirement planning and tax advising to help dentists keep more of what they earn.

If you would like additional help or are interested in having Bruce Bryen speak to your dental society or study club, he can be reached at bruce@thedentistsnetwork.net  or at 1-800-988-5674.

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