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For businesses that own their building, cost segregation is an IRS-approved method of shifting a significant portion of the depreciable basis of your building from 39-year life property, to five-, seven-and 15-year life property. By reducing the depreciable life of your property, 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.