Description of benefits of cost segregation for healthcare, maximizing cash flow!

1. Building Foundations for the Future
Cost Segregation – The Key to Maximizing Cash Flow

2. Cost segregation – an analogy!
If you won the lottery for $3.9 million dollars, would
you:
a. Take your payout of $100,000 a year for 39
years, or
b. Take a lump sum payment?
Why?

3. What is Cost Segregation?
Cost Segregation (CS) is a strategic approach to
maximizing investment cash flow for property
owners who have built, purchased, added to, or
remodeled real estate.
A Cost segregation study segregates the costs
and the useful lives of the individual property
components for tax advantages.

4. Case study
Your practice buys improved land and builds a
brand new facility.
Here are the details:
Land Cost = $725k (land) + $375k (land
improvements)= $1,100,000
Building Cost = $3,900,000
Total Costs = $5,000,000

5. Option #1
The IRS allows owners to depreciate (and deduct
from corporate taxes) the cost of the building
over 39 years, so:
Building Cost of $3,900,000 / 39 yrs = $100,000/yr
Note: Land improvements not segregated and not depreciated
90% of people choose option number 1 because they do not understand Option #2

6. Option #2
The IRS also allows owners to segregate the different costs
of the building and depreciate (and deduct from
corporate taxes) the cost of each of these items by its
expected life.
For example, carpeting does not last 39 years, why
depreciate it over 39 years?
There are four categories of property:
Land (not depreciable)
Land Improvements (parking lots, etc.) – 15 years
Certain Personal Property – 7 years
Most Personal Property (Carpet, cabinets) – 5 years

7. Option #2 - continued
Using the same cost data and based upon a “Cost
Segregation Study,” the building components
have been broken out as follows:
Land - $ 725,000
Land Improvements - $ 375,000
Building structure - $2,715,000
5 Yr Personal Property - $1,185,000
Total Cost $5,000,000

8. Option #2 - continued
Applying the IRS approved depreciation
rates we have the following deductions
Land - $ 725,000 (not depreciable)
Lanprovements $ 375,000 / 15yr = $ 25,000
Building structure - $2,715,000 /39 yr = $ 69,615
Personal property $1,185,000 / 5 yr = $237,000
Total Annual Depreciation (1st 5 years)=$331,615

9. Options 1 & 2 - compared
Option #1 – we have a $100,000 annual deduction
for 39 years
Option #2 – We have a $331,615 annual deduction
for 5 years, plus a $94,615 deduction for the
next 10 years and a $69,615 deduction for the
last 24 years
Which would you prefer?

10. Options 1 & 2 - net present value @8%
Option #1 – we have a $100,000 annual deduction
for 39 years= npv of $1,187,858
Option #2 – We have a $331,615 annual deduction
for 5 years, plus a $94,615 deduction for the
next 10 years and a $69,615 deduction for the
last 24 years for a npv of $1,987,191
Option #2 confers $799,333 greater benefit!!

11. Another benefit of CSS
Consider this: You construct a new building for a total cost
of $5,000,000. You do NOT do a CSS. Two years
later the HVAC breaks down and must be replaced at a
cost of $390,000. There is NO tax benefit!
Same scenario but you have a CSS prepared which
identifies the HVAC construction cost at $390,000. You
have depreciated this cost $20,000 ($390k/39 yrs =
$10k per year x 2 yrs=$20,000). In this scenario, you
can deduct the remaining value ($370,000) from
your taxes!

12. And yet one more example:
Consider this: You purchase a building which will be
renovated for $2,000,000. You demolish the interior
and renovate the space at a cost of $2,000,000. You do
NOT do a CSS. No Current Tax Benefit!
Same scenario but you have a CSS prepared which
identifies the personal property at a value of $500,000.
You demolish the interior and renovate the space at a
cost of $2,000,000. In this scenario, you can deduct
the value of the demolished personal property
($500,000) from your taxes!

13. A word about Leasing
Cost segregation can also be applied to leasehold improvements
provided there is documentation with a cost schedule
describing components paid for by owner and tenant.
If costs not identified, you cannot depreciate.
IMPORTANT and rarely used: Tenant can deduct the full amount
of his basis at end of lease term
Example: Tenant provides flooring and cabinetry at a cost of
$30,000 which he can depreciate over 5 years at $6,000/yr.
Tenant moves at end of 3 years. He can deduct the remaining
$12,000 from taxes. ($30,000 - $18,000 = $12,000)

14. Cost segregation – who can benefit?
Purchased property within the last 6 years
Constructed building within last 6 years
Purchased property with intent to renovate
Invested in significant property improvements
Invested in significant tenant improvements

15. What types of properties can benefit?
Medical offices
Surgery centers
Diagnostic & radiology centers
Oncology treatment centers
Laboratories
Assisted Living Facilities
Nursing homes
Hotels
Restaurants

16. Why do a Cost Segregation Study (CSS)?
• Match depreciation to real, expected rates
• Lower your taxable income
• Maximize your cash flow
“CPAs should routinely recommend the use of
cost segregation studies ”
~ Journal of Accountancy

17. IRS Requirements for Effective Study
The primary reason most
CPA firms do not
provide CSS is
because they do not
have the engineering
expertise to effectively
carry out the work.
This requirement is
explicitly described in
the IRS Guidebook.
Three IRS
Requirements
CPA or
Tax Pro
Cost Expert
Architect-
Engineer

18. In conclusion
I believe that Cost Segregation Studies and their
benefits are the most under utilized tax
advantage available to every facility owner.
I also believe that every practice that pays for
tenant improvements should address this benefit
in their lease and should evaluate the benefits of
commissioning a CSS.

19. For more information, contact:
Frank Ricci
Principal
Healthcare Realty & Development Services
300 N. New York Avenue
Suite 2802
Winter Park, FL 32789
Ph: 407-947-5074
Email: HealthcareRealtyServices@gmail.com