Case Study: Cost Segregation Analysis for a Dental Office in Surprise, Arizona

Narrative

In 2023, the owners of a dental office in Surprise, Arizona undertook strategic tax planning to enhance their investment. The property consists of a single 3-story building originally constructed in 2009.

The building showcases modern architectural elements and is well-appointed with high-efficiency HVAC systems, water heaters, contemporary lighting fixtures, and specialized dental equipment. Amenities include a reception area with custom cabinetry, multiple exam rooms outfitted with dental chairs and equipment connections, offices, a break room, and ADA compliant restrooms.

The owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study of the property. This study aimed to identify and reclassify specific assets, enabling the acceleration of depreciation and optimizing tax benefits.

Objective

The primary objective of the cost segregation study was to identify and classify the dental office's assets to optimize the owners' tax savings. By breaking down and reallocating components into shorter depreciation life categories, ETS aimed to provide both immediate and long-term financial benefits through accelerated depreciation.

Methodology

ETS employed a detailed, engineering-based approach, which included:

1. Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
2. Document Review: examining architectural plans, construction documents and accounting records
3. Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
4. Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)

Asset Allocation

5-Year Class Life

Total Depreciation Allocation: $1,190,825.89 

Percentage of Total Depreciable Basis: 49.62%

5-year class life assets identified in this study include:

• Specialized dental equipment (dental chairs, x-ray machines, sterilizers)
• Cabinetry and countertops
• Decorative lighting and ceiling fans
• Flooring (carpet, laminate, vinyl)
• Dedicated electrical connections for dental equipment

39-Year Class Life

Total Depreciation Allocation: $1,209,174.11 

Percentage of Total Depreciable Basis: 50.38%

39-year class life assets identified in this study include:

• Building structure (walls, roof, doors, windows)
• HVAC and plumbing systems
• Electrical wiring and outlets
• Restroom fixtures and partitions
• Fire protection sprinkler system

Class Life Details:

Summary

The cost segregation study for this dental office in Surprise, Arizona demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in maximized tax savings and improved cashflow. This approach enhances the dental practice's profitability and allows for more efficient capital management. The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments.