John K. McGill, CPA, MBA, JD, and Robert "Bo" Elliot Jr., CPA
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One of the few benefits of the recession is a reduction in the costs of construction and renovation projects. Doctors should consider making long-postponed improvements to their office space now, because tax incentives are available that further reduce out-of-pocket costs.
Section 190 deduction
First, consider Section 190 of the Internal Revenue Code, which provides for an immediate deduction of up to $15,000 annually for the costs associated with making a facility more accessible to the disabled and elderly. This is in place of depreciating those costs over a 39-year period.
The expenses eligible for this benefit are those that a taxpayer incurs that are specifically attributable to the removal of existing barriers. It DOES NOT include expenditures incurred in connection with new construction or extensive renovations. An "extensive" renovation is determined on a case-by-case basis.
Typical eligible projects include grading walkways and parking lots, adding ramps, widening doorways and stairs, adding handrails in bathrooms, lowering water fountains or countertops, and signage. As you consider upgrades to your office, keep this cost in mind – if you spend $15,000 and your marginal tax rate is 40%, then your 2010 taxes will be reduced by $6,000.
ADA tax credit
The tax code also has a Disabled Access Credit for providing access to disabled individuals. The expenditures to which this credit applies are similar to the items listed above. The credit is 50% of the amount of eligible access expenditures for a year that exceed $250 but do not exceed $10,250, with a maximum tax credit of $5,000 annually. This credit can also be carried back.
Suppose your access expenditures total $30,000. You can combine the two incentives and save up to $11,000. This means that you have reduced the out-of-pocket cost by one-third.
Cost segregation study
Finally, let's look at the tax code section with the most potential to really save you some tax dollars. Internal Revenue Code Section 168 is the basis of this tax saver, a cost segregation study. Previously, buildings were depreciated over 39 years. This was for tax purposes only and disregarded the actual economic facts of the situation. Hospital Corporation of America (HCA) realized that the disparity between reality and the tax code was so great that they challenged the government's position.
HCA took the position that portions of a building wear out at different times. While the core of a building will certainly last for 39 years, other components may not. For example, carpet may have a seven-year life, while wall coverings may last 10 years. Landscaping, parking lots, lighting, specialty wiring, plumbing, and many other components also have useful lives of less than 39 years. HCA won the battle and changed the depreciation landscape for the better.
This benefit is not limited to new construction. If you bought or constructed your building after 1986, a cost segregation study may still benefit you. Two factors are important to determine if such a study would be cost-effective for you. First, your building, excluding land, should have cost more than $500,000. Second, you should plan to retain ownership of the building for at least five years.
We were involved in a recent case where the purchase price of the doctor's new office was $1,825,000, including the original building and the new renovation. In this case, the engineer determined that $405,920 (22% of the total cost) was attributable to shorter-lived property. The norm for dental properties typically falls between 20% and 35% of the total. In this case, the taxpayer was able to deduct $213,800 of additional depreciation in the first five years of use.
This deferred taxes of $91,934 over the first five years by accelerating a large portion of the depreciation into the first five years. The present value of this accelerated depreciation amounted to $73,458. This compared very favorably to the typical cost of a study, which is $8,000 to $10,000. As you consider new construction or renovations, remember there are tax benefits awaiting you. It's far easier to take advantage of them if you plan your projects armed with the knowledge of how to maximize the incentives.
John McGill provides tax and business planning exclusively for the dental profession and publishes The McGill Advisory newsletter through John K. McGill & Company, Inc., a member of The McGill & Hill Group, LLC. Bo Elliot provides accounting and CPA services through Elliott Davis, affiliate of The McGill & Hill Group, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com for more information.
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