Over the past decade, thousands of ASCs have been constructed or have changed hands across the United States. While most of these facilities operate profitably, some may be missing a ripe opportunity for increasing cash flow: accelerated income tax depreciation associated with buying, building or improving properties.
After an ASC facility is constructed or acquired, owners depreciate the total construction cost or acquisition basis under federal income tax rules to recover their investment. For nonresidential real estate, the depreciation period is 39 years. For a $5 million facility, this would result in an annual straight-line deprecation deduction of $5 million divided by 39, or $128,205.
A better alternative exists
Under the same federal income tax laws, businesses that build or acquire ASC facilities may accelerate depreciation on the cost of certain items associated with these facilities. Included are items considered to be personal property or land improvements — for example, certain cabinetry, the medical gas system, surgical sinks, medical-related electrical, HVAC, plumbing, surgical lights and supports, and certain finishes. Land improvements that may qualify for accelerated depreciation include paving, landscaping and site lighting, among others.
Most personal property in a medical facility can be depreciated over five years and land improvements over 15 years instead of the typical 39-year period. In addition, these costs are also subject to accelerated depreciation methods. On average, 25.9 percent of the total construction cost or depreciable basis can be depreciated over five years, and 9.4 percent may be depreciated over 15 years.
Reclassifying these costs to the shorter life categories accelerates non-cash depreciation deductions, thereby lowering taxable income and the associated tax liability. This does not eliminate the tax but it does defer taxation to later years, allowing owners to reinvest those tax savings.
Consider the example of the ASC facility mentioned above. By reclassifying the depreciation percentages of the $5 million investment, the owner increases the annual depreciation deduction over the first three years by $915,000. At a 35 percent tax rate, the income tax liability over the same period is reduced by $320,000.
Most ASC owners miss the opportunity to take the maximum allowable depreciation charge because the required information is not provided by contractors in their billings or, in the case of an acquisition, the buyer doesn’t receive information regarding the value of the individual components acquired.
No time like the present
Another important consideration is timing. If the property was constructed or acquired several years ago, this benefit may not be lost. The IRS now allows taxpayers to catch up depreciation expenses that should have been taken in prior years (Revenue Procedure 2008-52). The increased depreciation deduction flows through the current-year return and no amended returns are required. This opportunity can create a substantial one-time depreciation deduction.
For example, we at Wilmoth & Associates worked with an orthopedic-related facility recently that had incurred construction costs of $5,087,000 in 2001 and 2007. Our analysis helped to increase the organization's current-year deduction by $726,000. This benefit flowed through to the 10 real estate partners.
The IRS refers to the study that supports these deductions as a cost segregation analysis. This technique has been in use by Fortune 1000 companies for years. However, many ASC owners overlook the opportunity because a cost segregation analysis requires engineering and accounting skills; knowledge of construction methods, materials and costs; and a knowledge of income tax regulations, court cases, and revenue rulings and procedures.
In today’s challenging economy and a political environment that is likely to see profit margins in the healthcare industry squeezed further, a cost segregation analysis may provide welcome fiscal relief for ASC facility owners. In our experience, the benefits of a study normally range from 15-30 times the related cost. If your practice has built or acquired ASC facilities in the past few years without taking advantage of accelerated depreciation of costs, now is the time to take a closer look.
Mr. Wilmoth (johnw@wilmothassociates.com) is a principal with Wilmoth and Associates. He has more than 35 years of experience in assisting taxpayers with their cost segregation and valuation issues, as well as a decade of specialized experience in providing cost segregation studies on medical facilities. He is a former valuation partner with Arthur Andersen and was the firmwide head of its cost segregation service line. Contact Mr. Wilmoth at (940) 458-2860.
A better alternative exists
Under the same federal income tax laws, businesses that build or acquire ASC facilities may accelerate depreciation on the cost of certain items associated with these facilities. Included are items considered to be personal property or land improvements — for example, certain cabinetry, the medical gas system, surgical sinks, medical-related electrical, HVAC, plumbing, surgical lights and supports, and certain finishes. Land improvements that may qualify for accelerated depreciation include paving, landscaping and site lighting, among others.
Most personal property in a medical facility can be depreciated over five years and land improvements over 15 years instead of the typical 39-year period. In addition, these costs are also subject to accelerated depreciation methods. On average, 25.9 percent of the total construction cost or depreciable basis can be depreciated over five years, and 9.4 percent may be depreciated over 15 years.
Reclassifying these costs to the shorter life categories accelerates non-cash depreciation deductions, thereby lowering taxable income and the associated tax liability. This does not eliminate the tax but it does defer taxation to later years, allowing owners to reinvest those tax savings.
Consider the example of the ASC facility mentioned above. By reclassifying the depreciation percentages of the $5 million investment, the owner increases the annual depreciation deduction over the first three years by $915,000. At a 35 percent tax rate, the income tax liability over the same period is reduced by $320,000.
Most ASC owners miss the opportunity to take the maximum allowable depreciation charge because the required information is not provided by contractors in their billings or, in the case of an acquisition, the buyer doesn’t receive information regarding the value of the individual components acquired.
No time like the present
Another important consideration is timing. If the property was constructed or acquired several years ago, this benefit may not be lost. The IRS now allows taxpayers to catch up depreciation expenses that should have been taken in prior years (Revenue Procedure 2008-52). The increased depreciation deduction flows through the current-year return and no amended returns are required. This opportunity can create a substantial one-time depreciation deduction.
For example, we at Wilmoth & Associates worked with an orthopedic-related facility recently that had incurred construction costs of $5,087,000 in 2001 and 2007. Our analysis helped to increase the organization's current-year deduction by $726,000. This benefit flowed through to the 10 real estate partners.
The IRS refers to the study that supports these deductions as a cost segregation analysis. This technique has been in use by Fortune 1000 companies for years. However, many ASC owners overlook the opportunity because a cost segregation analysis requires engineering and accounting skills; knowledge of construction methods, materials and costs; and a knowledge of income tax regulations, court cases, and revenue rulings and procedures.
In today’s challenging economy and a political environment that is likely to see profit margins in the healthcare industry squeezed further, a cost segregation analysis may provide welcome fiscal relief for ASC facility owners. In our experience, the benefits of a study normally range from 15-30 times the related cost. If your practice has built or acquired ASC facilities in the past few years without taking advantage of accelerated depreciation of costs, now is the time to take a closer look.
Mr. Wilmoth (johnw@wilmothassociates.com) is a principal with Wilmoth and Associates. He has more than 35 years of experience in assisting taxpayers with their cost segregation and valuation issues, as well as a decade of specialized experience in providing cost segregation studies on medical facilities. He is a former valuation partner with Arthur Andersen and was the firmwide head of its cost segregation service line. Contact Mr. Wilmoth at (940) 458-2860.