Dentists who have previously built, or are considering building, a new office could benefit from a cost segregation study to maximize any available tax deductions. A cost segregation study can be done on any property that is producing income and can accelerate your depreciation deductions, allowing you to get more money in your pocket right away. This way, you’ll pay less in taxes and improve your cash flow.
In this episode of The Art of Dental Finance and Management podcast, Art meets with Mark Rogers, Eide Bailly’s Principal-in-Charge of Fixed Asset Services, to discuss how cost segregation studies can help dentists save money on a new office build. With a team of CPAs, construction managers, architects and engineers, the Fixed Asset Services team looks at how to maximize deductions. Especially with the advent of the Tax Cut and Jobs Act and the CARES Act, there are even more opportunities to take advantage of available tax savings.
A cost segregation study breaks out a building into different components, trying to find some lower life property within it in order to get the standard 39-year depreciation schedule into a five-year, seven-year or 15-year period to secure bonus depreciation. For example, if you put a component into five-year period and get a 50% bonus, you can take half of your five-year cost in year one.
Reach out to Art if you have any questions regarding dental finance and management for your dental practice. More information about the Eide Bailly dental team can be found at www.eidebailly.com/dentist.
Cost segregation studies can be very complex. Our team of experts can help make it easier, saving you money and peace of mind.
Show Notes and Resources
- Eide Bailly’s Dental Practice
- Decisions in Dentistry magazine
- Academy of Dental CPAs
- Cost Segregation: The Right Asset Classification Produces Huge Tax Savings
- Increase Cash Flow with Available Tax Credits Deduction and Incentives
- The Business of Dentistry: A Series For Success
And it is a windy and might even be a rainy day coming up here in Southern California here in late January. And today's topic is one that could save you tens of thousands of dollars in taxes. Let me repeat, save you tens of thousands of dollars of taxes for those of you that have built dental offices out, whether you built it out, built out of dental office that you don't own, you just paid for the leasehold improvements. Or you maybe you bought an office suite in a professional building or maybe you built or bought a freestanding building that you house your dental practice?
And we're going to be talking about cost segregation studies today. And my guest is Mike Rogers, who's the director of Fixed Asset Services at Eide Bailly, which is my mothership. I'm a dental director at the CPA firm of Eide Bailly. I'm out of Tustin, California, and Mark is out of Chicago. So we're going to be talking about what is a cost segregation study. Why is it important? And if you qualify for one, what can it do to help you with your taxes? So we'll get to Mark in a minute.
I want to give you some information, as I always do. I want to share with you about our wonderful partner, Decisions in Dentistry magazine, Decisions in Dentistry, and our podcast. I've been partnered up for over a year now. They are the number one clinical magazine in the country. Not only do they have a great publication, but they also have a fantastic website where you can read all kinds of articles. They are on the cutting edge of everything that's going on with the COVID-19 pandemic and dentists and getting vaccinations and giving vaccinations and all these things.
So basically you want to go on to their website at www.DecisionsinDentistry.com. They also have great continuing education courses. 140 courses available that you can register for a year for one very reasonable price and have access to all the courses. And if you want a complimentary consultation with anybody from the Academy of Dental CPAs, you can click on there and then we will get in touch with you. And since I mentioned the ADCPA, that is my other mothership. No, this is not an episode of Star Wars, I promise. But this mothership is a group that I formed 20 years ago with several other dental CPAs across the country.
We're 24 CPA firms across the United States that represent over 9,000 I'm sorry, 10,000 dentists now over ten thousand dentists. And if you are not working with a dental CPA and we are right in the middle of all of the new forms and forgiveness and second round of the Paycheck Protection Program and the filing requirements for the HHS Provider Relief Fund, folks, this is a it's like a second profession I've been forced into. And as you know, I've been reporting to all of you about this. We're not going to talk about it on this on this broadcast, which is probably going to come out sometime in February. But do listen for our podcasts and watch our website www.EideBailly.com.
And if you're looking for a dental specific CPA anywhere in the United States www.ADCPA.org. OK, so with that said, I want to get to my guest. My guest is Mark Rogers. Mark is, as I said, director of financial services of real estate services for Eide Bailly in. He's out of Chicago. And Mark and his team basically facilitate cost segregation's studies for dentists and for all other business owners. And by the way, you know, you might more than likely, if you're listening to this podcast, you're a dentist. But what if your spouse has a business that owns a building? What if your family owns a lot of commercial real estate or maybe even residential? We'll talk about that today. This is something that you need to listen to. So I would with great pleasure. Mark Rogers, welcome to the Art of Dental Finance and Management.
Mark Rogers Thank you for having me. It is great to be here.
Art Wiederman, CPA Well, I appreciate that. Now, Mark, I understand that you are an author. And I from what you told me, what you authored has nothing to do with cost segregation studies, at least I don't think it does. Tell us a little bit about that.
Mark Rogers Very true fun fact, I did write a book, and typically accountants don't write books, but the genesis of my book, which is called 52 Greatest Moments World Series of Poker, was because of accounting. So when I started my career going out doing this cost segregation analysis, I do a lot of traveling and a lot of hotel stays and a lot of late nights. And I found myself watching late night poker with the rabbit cam and seeing the winners and the losers and the personalities. And I got so interested, I started to write blogs on poker. And then that turned into a book of 52 Greatest Moments of the World Series of Poker. So I kind of collected all those blog posts and got it into a very nice coffee table book.
Art Wiederman, CPA So if this accounting thing doesn't work out for you, you got a second outlet, huh?
Mark Rogers Yeah, yeah. I guess I got that going for me.
Art Wiederman, CPA So I'll have to warn my brother, my one brother Michael, who I haven't talked to much about on the podcast. I love him to death. He's 5 years younger than me. He is actually a gaming dealer at the Grand Hotel in Las Vegas. And he does not deal. I don't think he deals poker. He deals blackjack and he does roulette. So, you know, if you're coming there, I might have to warn him because now you don't count cards, right?
Mark Rogers Well, here's the thing. I wrote a book on the history of poker. I am probably the world's worst poker player. So if you're going to buy my book because you want to get better, you're going to be sorely disappointed. But if you want something with pretty pictures and a good story, it sure is that.
Art Wiederman, CPA Very cool. Well, that's a great story, Mark. So let's get into our topic first. Tell us a little bit about your story other than poker, which we've already learned. Tell us about your story, how your career started and how you ended up at Eide Bailly. How long have you been with Eide Bailly?
Mark Rogers So I'm going on two years now. Eide Bailly leading our fixed asset services group. But it really all started at the architecture career fair way back in 1990, no 2000. And it was at that time that a little background. I'm an architect. OK, so how does an architect work for an accounting firm? Well, I knew very early that I was a horrible designer, just like I was a poker player, so I said.
Art Wiederman, CPA You're a horrible poker player, how do you do anything well, that's what I want to know?
Mark Rogers So hopefully we'll get to that at some point. And I knew that I was very self-aware. I loved the design. I love the architecture. I loved playing with Legos when I was a kid. And it was always a dream, but I just wasn't cutting it. But what I was good at was the construction, the physics, the structural steel, the lighting. And so I ended up getting my dual degree with a masters of business. And I'm at the career fair. And there's a booth for this firm called Ernst and Young.
Art Wiederman, CPA I've heard of them.
Mark Rogers And no one I could guarantee you who was at that architecture career fair knew what Ernst & Young was, knew what even a big four was. Because everyone there wanted to be the next Frank Lloyd Wright. So I saddled up to them. They were lonely. And we started to discuss like, why are you here? What's this all about? And they wanted to know about me and they start talking about the cost segregation and how they need engineers and architects to help them realize these deductions on the tax level.
And at this point, I knew I didn't want to do Auto CAD. And so by default I said I'm in. And by default they had to hire me because I was the only one applying. And that's how I became, you know, architecting to this accounting world, and then I found out, gosh, Ernst & Young, big four, big time, and it all kind of went downhill from there, did that for eight years. Primarily just cost segregation all day.
And then after eight years, move to Grant Thornton, another good sized firm based out of Chicago, and dabbled not just with cost segregation, but other fixed asset services to get deductions and to get credits for our clients to that for six years, and then came over to Eide Bailly two years ago. They were looking for someone to lead that practice. At the time, I didn't know what Eide Bailly was because, as you know, Art, Eide Bailly is all west of the Mississippi and I'm in Chicago and I call them Eide Bailly and they're headquartered in Fargo. And at the time, my wife said, that's a trick. They're going to make you move to Fargo.
And I said, I don't know. They seem like nice guys and looks like a good situation. And so I've been doing that for two years now. And I'm happy to say that in our two years we went from 5 construction dudes doing this cost segregation. We're now 25 people. CPAs, construction managers, architects, professional engineers. It's a whole host of people, motley crew coming together to get deductions and credits in the built environment.
Art Wiederman, CPA Yeah. See actually Mike, our objective on this podcast and unfortunately with this horrible, horrible pandemic, our national debt is going up. Our job is to drive it even further, to get more tax deductions for our clients and in my case, for our dentists. So let's launch into this topic here. So what is a cost segregation's study? Let's look at a very high level. What is it? Why do you want to do one of these and how does it work? Why is it important?
Mark Rogers Well, I'll start with the last question. Why is it important? It's a deduction. It accelerates your depreciation deductions so you get more money in your pocket now. So what is it? Cost segregation is componentizing your building and building improvements.
Art Wiederman, CPA Is that a word componentizing?
Mark Rogers I trademarked it right now.
Art Wiederman, CPA Componentizing, that's 5 syllables. That's more than what's allowed on this program. But go ahead.
Mark Rogers So we're componentizing over many different construction divisions. Right. We're breaking it apart into concrete and masonry to electrical to plumbing. Right. And we're trying to pull out those components that get beneficial tax treatment. So let me back up just a second. Typically, when you get a building or build improvements, you put that onto your depreciation schedule at 39 years and it begins depreciating and you get 1/39th of that deduction for the next 39 years.
And it's great, you get the deduction on your return, you pay less tax, new cash flow. And so that goes on for 39 years. The point of the cost segregation's study is to break out that building and try to find some lower life property within that and we can go through some examples. We try to get that 39 year, the name of the game is to get into 5 year or 7 year or 15 year. What does that do besides waiting 39 years for deduction which will come eventually. Right. You can get all that within a 5 year period or a 7 year or 15 year period. Couple that and we'll talk about this more later too one hundred percent bonus depreciation essentially besides waiting 39 years. You can do a cost segregation study, try to get as much stuff as possible into a lower life and get all that money, that deduction right away as much as possible.
Art Wiederman, CPA Wipe that away.
Mark Rogers Right. Time value of money. No one wants to wait to get their deduction. You can take that money, reinvest it into your dental practice, maybe buy another dental practice. So that's the gist of cost segregation and why it's important.
Art Wiederman, CPA So, and this is going to be the theme of the whole program, because I will tell you, Mark, you and I have both been to this movie before. I mean, we have saved business owners, I mean, property owners, tens and in many cases hundreds of thousands. And probably since you were with Ernst & Young and Grant Thornton, where they're dealing with much, much bigger clients, could be millions, millions of dollars in taxes on a current basis.
Mark Rogers Right, right. This is a no brainer, if you need or are in the mood for tax deductions and most taxpayers are in the mood for tax deductions, whether they can use them in the current year looking forward, maybe even carrying them back. So it's always a good idea to maximize that deduction. The IRS will never say, hey, you forgot to take that deduction on your property, right?
Art Wiederman, CPA No, no, no.
Mark Rogers We have to be the ones to do that.
Art Wiederman, CPA Give us a little bit of the history. I mean, this didn't just happen one day with some senator said, oh, let's put this cost segregation into a tax bill. How did how did this all come to be?
Mark Rogers Right. So cost segregation has roots as a foundation. There's nothing overly risky about this provision. It's been around primarily since well, you can go back to 1987 Reagan's president and we just got a new tax bill in 87 and we had to wait another 30 years to get the latest one. But back in 87 they created this thing called MACRS Modified Accelerated Cost Recovery System, which told you on the tax side of the house, if you have a building, here's the recovery period to use to depreciate 39 years.
If you have a dental chair, a piece of equipment, use 5 year. If you have parking lot, use 15. And they just broke out hundreds of different components. And what life should be on it. Right. And so that came, you know, taxpayers start to absorb it, accountants start to absorb it. And then in 1995, a big company by the name of Hospital Corporation of America, they come around and they start taking their building and components design and start taking lower life property, not just on their sterilizers in their patient beds, which, you know, pro tip any fancy furniture, fixtures, equipment get a lower life, but they start to components and take lower life and some of their building property.
Well, it didn't take long for the IRS to say, no, we do not like that. We think that buildings should be in 39 year and we don't like how your componentizing it. So it went to court and guess who won HCA. And that's why I'm here today. HCA won. And then accountants and tax payers start to take notice of that case and said, why can't we do that? And so it starts formulating a foundation of how do we go in there, engineer, and break out this building as much as possible? How do we report on it? How do we even charge for it for our clients? Right. So I'd say by the turn of the decade is when the big four and some of the bigger accounting firms started taking this in-house and doing it and making a product and service that they can help their clients with. Fast forward.
And then 9/11 hit. And ever since 9/11, this idea of bonus depreciation start to evolve where if you were to cost segregate as much stuff as possible into a lower life property, you can get bonus on it. So an example would be if you put something into 5 year and you've got 50 percent bonus, you can take half of your 5 year cost in year one. And it was a great thing. And then the rest of it was depreciated over four years.
And that was the value prop, so bonus has been on and off. No, it's been on for 20 years at 3 years of hiatus, but we've had some sort of bonus for the last 20 years. Right now, we live in a world of 100 percent bonus depreciation. So going from the early 2000s to now, all accounting firms, I would say top 50, I would think, have some sort of cost segregation department, some sort of way to get those deductions, and then it's really turned into a cottage industry the last 10 years, it seems like everyone and their uncle on the engineering boutique side are starting to do some of these cost segregation analysis. So really, the history, it's been well vetted. It's nothing that the IRS hasn't seen, you know, a thousand, 10,000 times.
Art Wiederman, CPA And I think the IRS has even basically, they yelled uncle at some point and didn't they put together some sort of in there because there's a thing called the Internal Revenue Manual folks. And basically it's the IRS' rules of the road. And I believe and correct me if I'm wrong, that a part of the manual are kind of the rules. If you're going to take a cost segregation study taxpayer, these are the things you got to do, right? Isn't that even in the Internal Revenue Manual?
Mark Rogers You're spot on. And that's a really good point. And so I can speak a little bit to the ATG, the Audit Technique Guide. Now, keep in mind, there are no. There's no issuance of law from Congress that says this is how to do a cost segregation, we rely on cases like HCA and other cases that came after that.
However, the IRS did give or did develop an audit technique guide for cost segregation. And they did that in the early 2000s and it's been added on to since. But essentially what it is, it's a manual for their field inspectors to read. So when they go to audit, they could ask these questions and be familiar with it. And because the government has to be transparent, they have this. You can go right now to Google and go on the IRS.gov and you can search cost segregation technique guide. And it's kind of the how they see cost segregation.
So and that's a good thing, because now we know the answers to the test. Right. We can read that and say this is what they're looking for. This is how they apply to cases. We can argue if we wanted to. But really the arguments have been far and few between, because, like I said, this has been going on for decades now. And now everyone has a good sense of what can be taken from the building level as personal property and land improvement. And I printed out the ATG. I refer to it once a week. It's a great guide to, you know, what it cost segregation and how to do it properly.
Art Wiederman, CPA Now, the one thing I understand, Mark, about this and then I want to get into some of the weeds here, is that I've had doctors who said, well, you know what, I don't need to do this study. I segregated it myself. I talked to my contractor and he told me that that this part is for, you know, personal property in this part. Don't the rules and again, correct me if I'm wrong, don't the rules say that you really have to have an engineered study in order for this to work?
Mark Rogers Right. So, again, go into the audit technique, which is not law, but it's highly recommended. They have a section called the 13 Principle Elements of a quality cost segregation study. And one of those elements is to engineer or have some kind of engineering background to help you in that process. Right. Get a third party vendor. They talk about that a little bit in the in the ATG. So to the extent. Yes, if you can do stuff in-house and get the low hanging fruit, OK, that's fine. I'll say two things. One is the burden of proof. When you do that, whenever you're going after deductions, something faster than 39 years, the burden of proof is on you. OK, and so part of the cost segregation study is not just maximizing the deductions for our clients, particularly our dental clients, it's giving them the report in the memos in the back up to substantiate that deduction. So if it ever gets looked at, it actually holds true.
Art Wiederman, CPA Great. This is great information. All right. Let's first of all, what kind of properties can I do this? Is this residential, is this commercial? How does this work? What kind of properties can I do this on?
Mark Rogers Right. So I would say any property that's producing income. You can do a cost segregation study on so of course, dental properties, commercial properties, industrial, I've done everything from casinos in Vegas to office buildings down the road and everything in between. It's really diverse what we're able to do with cost segregation.
Art Wiederman, CPA So let's walk through the mechanics. All right. Somebody is listening to this podcast. They say, you know, I built a building or I'm building a building. It's going to cost me 2 million dollars. And wow, this sounds really cool. And by the way, we're going to get a little bit I'm going to get a little bit into the kind of how you do this with an LLC and renting to your corporation we'll get down to that a little bit. But what are the mechanics? So someone calls you up and says, I heard this podcast. This is sounds like a really good idea. Real quickly, what are the mechanics? What does your team do? Who's involved? I guess you go make a site visit, you take a bunch of measurements, right?
Mark Rogers Right. So the process starts. The conversation starts really with an intake form. Eide Bailly has one online where you fill out a request. We call it a request for assessment. We also have it in PDF. And so we send that out. Right. And we get that back and start that conversation. And any number of accounting firms and boutique firms do the same process, an intake form. It's usually one page ask how much is the building? What's the address? How many square feet? How many tenants? A couple more questions. It doesn't take much for us, and we say the greater cost segregation industry, to turn around an assessment.
And I would say the assessment proposal is always free. You don't have to pay for that. You shouldn't have to pay for that. And the reason it's free is because 9 times out of 10, after you see the assessment, you're going to want to do a project because why wouldn't you? Because we're essentially giving free money. So it starts with the RFA. You fill it out within a week or two. We come back and we give you a one pager and on that one pager, sometimes on one pagers. If it's a proposal, it goes a little longer, but essentially a one pager that says, here's the opportunities we found where it's cost segregation or it's any number of different building deductions. We talk about those too because cost segregation is not the only game in town.
But we'll holistically look at your property, tell you what provisions you can hit on, what levers you can pull. We'll tell you the projected deductions. And that's based on we've done thousands of these in our database and we're able to see building type, cost and tell you exactly where it's probably going to end up. Right. Kind of a rule of thumb method and then the fee to do the work.
And so you have everything on one page and once you greenlight that, then comes the engagement letter. We execute that and then we're off to the races and how we do it at Eide Bailly. And I imagine others do this too, is we have a kickoff call. We do this about anywhere from 200-250 times a year. So it's important to have a kickoff call to talk project logistics, talk project management, because eventually, yes, we're going to have to go on site.
So we talk about the 13 principle elements of a cost segregation study from the ATG. Well, one of them is to tour the site and take photographs and even video of the building components to prove again, you have to prove the burden of proof is on you. And essentially, when you hire an accounting firm to do it, that's what you're hiring them to do. To prove this deduction. So, yeah, there is a site tour. Not in all cases. There are some cases where we can fly by thanks to Google Earth and other technology, especially in this pandemic. It's really challenged us to think of other ways to get this information.
Art Wiederman, CPA I was wondering about that.
Mark Rogers It's changed many things about our lives, but that's one of them in cost segregation is how do we tackle that? And so how do we leverage technology? And we do use iPads and kind of our virtual back and forth in some cases, particularly with hospitals and things like that.
Art Wiederman, CPA So, Mark, let's talk about, let's get into our dentists. So dentists are going to do one of three things. They're either going to build out a suite on their own, which they're renting and they don't own. So they're going to only pay for tenant improvements and they're not purchasing it. Then they're going to buy an office suite, either in a maybe in a strip center, maybe in many cases a professional medical dental building, and then they're going to build their own. So I'm assuming we approach these all a little differently, right?
Mark Rogers Yes, I would say the past. Well, I gave you the history on cost segregation. I say the past 7 years there have been numerous releases of provisions that allow you to accelerate deductions and credits in the built environment. So it doesn't matter if you are purchasing, if you are renovating or you're building new or some combination thereof, there is a tax savings provision out there for you. And the reason there is, the reason Congress does this is because they want to spur growth. They want you to build, they want you to acquire, and they want all the good things that come out of that. So and I'm happy to talk about each one of those situations, if you like.
Art Wiederman, CPA Well, let's do that in a second. What I do want to do, since we're about halfway through our podcast is, folks, this is an opportunity to save money. This is a way for you if you have not done this. And we are also going to talk teaser teaser coming about a way that if you built an office, I believe, back to 1987, if you built an office, there is a way to go back 5, 10, 15, 20 years and recapture in one year all the deductions you should have taken if you did this back 5, 10, 15, 20 years ago. But that's the teaser. We're going to get to that a little bit.
But, Mark, if someone is interested and they want to just talk to you or someone on your team about how this works and just maybe have an initial complimentary consultation, what would be the best way to get a hold of you? And we will put this in the show notes.
Mark Rogers Right. I would say two things. First, if you can navigate to EideBailly.com and navigate to our services, there's something there, Fixed Asset Services and we have an online intake form. And sometimes that gets lost in the digital world of the Web. So the more direct path, I would say would be to email me and I can direct you or even send along the intake form so we can start that conversation. So my email is mdrogers@EideBailly.com.
Art Wiederman, CPA And so that's the best way to do is to send you an email. OK, sounds good. We'll give this information out at the end and also the show notes. So let's get into some of the ways that we can do this. So let's say a dentist is going to build. Let's start with build a building, OK? They're either going to buy a building that's already standing and they're going to basically do the, it's a shell and they're going to improve it, or they're going to build it from scratch.
So you've got to allocate between the land and the building, obviously, because the land is not depreciable. But give us some maybe even some examples of what you guys have done with a with a medical dental build because medical dental is the same concept. Give us, just how would that work if someone is buying or building build.
Mark Rogers Right. So we get this quite a bit. In the last two years, looking at historical data, we've done over a hundred dental buildings and even more on the medical office side. So this is definitely, not so much a trend, but something that hasn't really slowed down even during this pandemic is the building of these dental facilities and the purchasing of them.
So one in Arizona that we're doing currently is a current year build. It should be online in 2021. It is around that two million dollar purchase, which is, like you said, some land, some buildings. You got pull out the land - land's not depreciable. You're not gonna have any fun with land. Pro tip try to keep your land as low as possible if that's reasonable. Right.
But if we have a big bucket of building to play with, then we can break that out into its components and on new construction, you're going to get 100 percent bonus and anything that you find above and beyond 39 year that can get into that 5 or 7 year bucket. So in a new building situation, particularly with dentists, we're finding anywhere from 20 to 30 percent of your building cost can actually go into a 5 or 15 year bucket, which means 100 percent bonus depreciation year one, you're not waiting 39 years. You're getting that 400,000 to 600,000 dollars in year one. And that's new construction.
Art Wiederman, CPA Right. So real quick, let's because we are required by law, Mark, to do math on this podcast, because I am a dental CPA and we're part of a CPA firm. So let's say we build a building. I'm just going to pull numbers out of the air. Two million dollar building, a million and a half dollars goes to the structure, 500 goes to the land. Now, if the if the structure happens to be in San Francisco, California, on the bay or in Newport Beach, California, or on the island of Manhattan, it might be a different conversation. But let's just say a million and a half.
If you could take 30 percent, that's 450,000 dollars. Now, folks, you remember that bonus depreciation is a federal provision? Many states do not conform. Some do. So in, for example, California does not conform to bonus depreciation. So you're writing that stuff off over the rest of your natural life and then some. But let's just say for federal purposes, say you're in a, I'll just pull it out. Let's just say a 35 percent marginal tax bracket. Okay, so if I take 450,000 dollars times 35 percent, what is that point 35? That's 157,500 dollars in your pocket today or within the next 12 months.
And if you structure it right and we'll talk about that in a minute. I mean, these are big numbers, folks. So, OK, so that's if I build out a building, 20 to 30 percent for new construction. What if I mean, what if I buy an existing building that's already there and it's a shell and I gotta go in and build out the dental office inside of that?
Mark Rogers Right. And so, again, new construction, no brainer. Buying and renovating is even more of a no brainer because the provisions in the last few years have increased your cash flow opportunities when you renovate and especially when you purchase to. So Tax Cut and Jobs Act of 2017, they introduced a hundred percent bonus, which is a really good thing. They also introduced on purchased properties can now be eligible for bonus. So before the TCJA, only your new construction can get bonus.
OK, you can still do cost seg on your purchase and get a 5 year, but you can never get bonus on that 5 year. So that and 39 years you have to wait 5 years, which is still a really good answer, but you can never take it to one year with the bonus.
The TCJA said hey, if you purchase something, as long as you don't purchase it from a related party, you know your dad, your son, whatever, you can get bonus depreciation on that, just like you did for new construction. So the same value prop happens with a purchase. You're getting that 100 percent bonus and you're trying to carve out as much stuff.
Now, usually in a purchase, it doesn't have all the bells and whistles that you wanted it. Right. And so maybe there's not as much of that 20 to 30 percent of personal property that we're going to pull out and get there. But what you're going to do is you want the bells and whistles. You're going to build on it with drywall and electrical and you're going to put down flooring, you're going to get the decorative ceiling and you're going to do all these nice trim and maybe do some landscaping and really get it to how you're branded.
And those are all considered improvements because they happen after the purchase or the construction of a building is an improvement. And why is that important? Because in the CARES Act that came out last year, gave out a lot of good stuff and needed to, right, because we were in a pandemic and one of the provisions was something called Qualified Improvement Property.
Art Wiederman, CPA Yeah, I was going to mention that. Go ahead. This is great. This is this is huge.
Mark Rogers It really is a game changer. So Qualified Improvement Properties, if you're improving up an existing building and you can get 100 percent bonus on those costs if it qualifies. So not all improvement properties, QIP, not IP. And so it can't be anything structural, can't be anything except there can't be additions to the building. Right. But it has to be interior. Think you know, your drywall, think your flooring, think your ceiling. And lo and behold, our dental clients, that's essentially all they're doing. They're not doing now. They're maybe doing a little stuff to the outside. That's fine.
But a majority, what they're doing on their build outs is to the interior, nonstructural to the space to make it look good and make it functioning for what they need it for. So we're finding that on a renovation, 80 to almost 95 percent of those costs are qualifying. Or QIP. Right. And getting that 100 percent bonus depreciation, which before you could not because things like drywall and general electrical and general building stuff, we're not personal property. So in the cost segment, I say we get 10 or 20 to 30 percent on a new build or purchase cost seg. On a renovation, start thinking about 80 to 95 percent when you're kind of getting your head around your tax planning and strategy for the year.
Art Wiederman, CPA These numbers start getting stupid. I mean, I've actually had people who have done these and they end up throwing their business into a negative and we end up pulling a bunch of money out of a pension plan or doing a Roth IRA conversion. And this gets really fun.
I want to touch on the one that I think is going to affect a lot of our doctors, because not everybody who listen to this podcast is in the process of building out an office. So what happens? I was telling you before we went on the air, Mark, that I have a doctor who we got a we got a new client, a tax return, and they have1.3 million dollars in leasehold improvements over 39 years that they did 7 years ago.
So what if I have a doctor, which could be many people listening to this podcast, who built out an office and their tax preparer, their CPA, they didn't know what it cost segregation study was. So they just said, well, it's a building. It's the whole thing's over 39 years, no big deal. Can we go back? And this is the teaser I gave you earlier. Can we go back and fix this? What, how do we, what can we do about this?
Mark Rogers Yes, let me say this and I'll be clear. The deduction and the cost segregation's that the deduction is never lost, it's always yours, you just have to capture it. The only person that can take that deduction from you is yourself for not doing anything. Right. So the mechanics of going back and getting the deduction are quite simple.
So if you look back at your you know, you're in a taxable income year and you want these deductions and one place to look is your fixed asset ledger, what kind of building or buildings do you have? What kind of improvements have you put on that throughout the years? And we scrub that. And we scrub that against the TCJA, the CARES Act, many different laws and provisions and try to find as many deductions as possible.
And then we do a project and find those deductions, prove those deductions, and then you get them all in the current year, there's, you don't go back in time and amend returns, which can get messy. No amending necessary. The mechanism that the IRS allows us to use is something called a Change in Accounting Method 31-15, for purposes of this audience is a piece of paper that you attach to your return and essentially tells the IRS, hey, I forgot to take this deduction back in the day. I want it now. Here's the deductions I'm taking. Here's how much of the deduction, please and thank you.
Art Wiederman, CPA Here's the computations.
Mark Rogers There's no permissing of that. Just it's your deduction. And so it's really quite a simple process if you want to catch up and grab those deductions.
Art Wiederman, CPA Oh, absolutely. And I had a doctor who new client came in one time, Mark, and I saw an item on his depreciation schedule, dental office design 80,000 dollars. I said, I know the most expensive dental office design people. They are really good. OK, so the deal is that I said, no, we got to look at this and it turned out it wasn't dental office design. And we dug more. We dug more. And we ended up getting this guy about a 120,000 dollar refund for the build out of his office. And it's I'm sure you've got stories like that all the time.
So, folks, if you have built and I think, Mark, you can go back. I think I believe it's 1987, although by now, 1987, you're almost at 39 years. So it doesn't, it may not make a difference. But if you've built out an office Mark in the last 5 or 10 years, even 15 years, I mean, it makes sense to take a look at a, you know, 31-15, a 41 adjustment is what we call it. And the one thing, Mark, I want to point out as a on the tax side, you have to be really careful. You don't just go and do this. Many of you own your buildings in an LLC and you rent it to either your dental partnership or your S corporation or C Corporation or whatever it is.
Well, by definition, a dental, a rental property is a passive activity. So if I generate a loss in a passive activity, Mark goes in, he gets you 200,000 400,000 thousand dollars of bonus depreciation. We got a loss and then it goes on and you have a loss in a rental property. By definition, that's a passive loss. And if your income is over 150,000 dollars, that loss sits in a holding tank. You don't get it until you generate passive income or you sell the property.
So what we do, folks, is we do this thing. This is as technical as I'm going to get. We do this thing and we group the activities on the tax return. And if a CPA hasn't been working with us, they don't know how this works. But we do a group that says, hey, you know what, this LLC that owns this building is grouped with the dental practice that it rents to. And they are, you know, similar activities and the rules. And if you meet those rules, which most of you will, then you actually get to take the loss on your personal tax return for all those great bonus depreciation and QIP and everything we're talking about, it gets pretty sophisticated. And the IRS is sophisticated people, too.
So this was the point, Mark, that I wanted to make about this is that there's ways and you and I talked about this before, that's why I wanted to mention it is, is that if we do this and if you own the property in an LLC and you rent it, you have to do this grouping election. And if you ask your CPA what's a grouping election and they go, I don't know, then you need to give us a call or something like that.
So let's get into working with a contractor. OK, so I hire a contractor. And by the way, folks, you should be working with a dental specific contractor, somebody who has built dental offices. There's lots of them. There are lots of really, really great dental contractors, dental architects. A dear friend of mine out of Omaha, Nebraska. He's been on this podcast and he talks about how to do this.
So, Mark, when the dentist goes and hires an architect and a contractor, what should they be talking to them about with this cost segregation in mind? Is it the way the plans are drawn? Is it the way the invoices are set? How do we do this? And do you get involved in that at all?
Mark Rogers Yes, no doubt about it. We do. It doesn't happen as much as maybe I would like. So it's good to be proactive, but it does work and shows well, when you get in there early. I will say this. A vast majority of what we do is after the fact, we do what you talked about retroactive, look at it or hey, I just built this this year, can we do something with this and let it be known it's the deduction's yours. You're not going to lose it and we're going to maximize it. Right.
But to the extent that we can talk with a contractor during the construction is a good time to bring up what components we would like them to break it up. OK, so the GC will sometimes just give you a lump sum and say pay this monthly. Sometimes they break out electrical, sometimes they break out mechanical. And then if we come in early enough, we can have a conversation with them and say, can you break out the electrical and the lighting, voice data, switchgear. Right?
So if we can get actual costs that eventually turn into deductions, that's a lot better answer than us going to our construction manuals and estimating. Right. An actual is always better than estimates. So and we start to get that relationship. To take it one step further. And this doesn't happen too much because construction doesn't drive tax, but sometimes it does. Sometimes, I'm sorry, tax doesn't drive construction.
But if there are some materiality choices and we're able to tell you, you know what, why don't you go with this luxury vinyl tile because you're going to get a hundred percent bonus on that as opposed to using the ceramic tile in your lobby where you will have to depreciate that over 39 years. So sometimes, in rare cases, tax does drive construction, but most of the time, you know, if somebody wants marble in their lobby because it looks pretty, they're going to that's what they're going to do.
Art Wiederman, CPA So and the thing is, is that, you're right, I get a lot of people who have already built out their office and they've not really considered these things. And, you know, if you want the nicer finishes or the nicer this or the nicer that like Mark, you were saying. I mean, you know, you say, well, I want to keep the costs down. Well, sure, you want to keep the cost down, but this tax write off might pay for that and it might make it look like a lot a lot nicer.
Let's talk about, for example, I have a client right now who is going to move his office and he's going to spend about 350,000 dollars. Now, I've been told that, you know, I did one before I was part of Eide Bailly. I did, I had a client do one for a building that was about 250,000. And it was right on the margin of well, yeah, it makes sense.
So let's say we have doctors who are remodeling and a lot of times what will happen is a doctor's practice is going to be going really well. Obviously, you know, 2020 was not an example, but practice is going really well. And they're going to go ahead and they're going to take the office suite next to them. And they're going to build out. Maybe they're going to spend 100, 150, 200 thousand dollars on construction, or maybe they're going to build a, you know, a thousand square foot office suite or 1500 square foot office suite. And maybe it doesn't come to 250, 300. Can we do something? And I've always had an issue with this is as a CPA. Can we do something for our doctors who are spending 50, 100, 150, 200 thousand dollars? Does it make sense?
Mark Rogers No doubt it doesn't. It needs to be looked at as a smart small dollars. I would say maybe 10 years ago. You'd say, you need at least a million dollars to do a cost segregation study to go through the whole all the hoops, right. That is completely changed courtesy of the CARES Act and the TCJA. Now and we'll use a million dollar example. Say I get 20 percent. Right a 200,000 dollar deduction because I did a cost seg. They're going to find 20 percent that of the one million that I can put in to a shorter life. And there's a whole to do a whole project, whole process with that.
Well, now that we have qualified improvement property and bonus, you might put two hundred thousand dollars into, let's say, 250,000 dollars into a renovation and find that 200,000 of it can be one hundred percent bonus, so you're getting the same answer as doing a full blown course segregation. But you're getting it through a qualified improvement property analysis, so it's absolutely something that you need to be talking with your accountant and your accountant should be bringing this up.
And, you know, and Art, you talked about this a little bit about, it's one thing to get this deduction and that's what I do. I maximize the deduction. But if you can't use it or you don't know how to use it. Then it's really not worth that much. Right. And so when you deal with accounting firms that have this service in-house, you know, I have the luxury to call up Art and say I have this deduction. How do I use it for my client? I can call up the Scott Haberman's and the other partners in my office to figure out how we maximize that deduction.
So when it comes to, you know, under a million, where back in the day it has to be a million to do a cost seg, that's completely out the window, any improvement you do needs to be looked at through the lens of how much deduction can I pull out right now? And you need to be working with your accountant who's working with somebody else to make that happen.
Art Wiederman, CPA And you can work anywhere in the country. Right? I mean, you just need to get on an airplane and go do some measurements or get on Google Earth, like you said, right?
Mark Rogers Yeah. Right now, my home office is Chicago and an airplane before the pandemic it was an airplane. And so I'm part of and a lot of firms have this, a lot bigger firms have this and Eide Bailly has a national tax office. So my group of 25 people are part of a national tech tax office are sprinkled throughout the nation. And whenever our local office and partners say, hey, I have a client that is building and renovating or acquiring, we kind of fly in and swoop in and maximize that deduction.
Art Wiederman, CPA So and we're coming close to the end of our time here, Mark. But I want to cover one more area. So if our doctors get audited, have you been through IRS audits or have your team been through IRS audits for some of the cost segs you've done?
Mark Rogers Yes, it does happen and it's zero fun. Well, I wouldn't say that, it's kind of fun because we're prepared and we know we did a good job. And so we kind of show off our work and go about. But I will say this, this is very important, cost segregation has a long history and I can count on two hands how many times I've been a part of an IRS audit in the space and primarily those were with Ernst and Young and with Grant Thornton and very large, big, big projects.
Right. Remember, the point of cost segregation and the point of these incentives is the IRS and Congress they want you to build. They want you to acquire, they want you to renovate. So they want you to take these deductions. They want you to take these credits. And so, you know, as long as you have a professional put up a work paper to prove, again, the burden of proof is on you. And so usually you hire an accountant to help you with that. As long as you happen to have that documentation, it's very hard for them to take it away because it's yours.
Art Wiederman, CPA So the one thing that I want to point out, folks, is this and this is really important. There are tax deductions and I've talked about this on our podcast. We're into our third year of doing this podcast, which is amazing to me. Thank you to everybody that listens. Please tell all your friends about our podcast, it's grown. I mean, we have thousands of people that listen to us every single week.
And basically what has happened is there are there are tax deductions and there are unscrupulous people out there. There are people I'm just going to say the types I'm not going to say any names of companies, but conservation easements, welfare benefit plans, things like that. These are deductions, folks that there are. They're being sold to people, they're being sold to nice people, dentists like yourselves. And they have huge risk. And they are on the IRS' watch list. They are on the radar.
The IRS has flat out said we are going to come after you if you take these deductions. Cost segregation, as Mark just said, is completely opposite. Not only has the IRS, we asked that, yeah, this is legitimate. They've put it into their manual and they've said if you follow these rules and you do an engineered study and you do this and you do that, this is perfectly legal.
So what we're talking to you about is not something that we're trying to sell you to generate fees for anybody. This is a legitimate tax opportunity to put money in your pocket that you can use to pay down your house, to fund your retirement and to do all these things.
Mark, let me go back to the IRS audit. So when the IRS audits this, your garden variety IRS auditor doesn't really understand cost segregation study, no disrespect to any IRS auditors that might be listening. I don't think there are any, but if there are no disrespect. I would suspect that what they're doing here is they are, what they're doing here is that they are bringing someone in their specialty group to look at this who knows cost seg? Is that how it works?
Mark Rogers Yeah. So step one is you get an IDR information document request from the IRS that says we have a couple questions on these 5 points. So they never audit the entire study, per se, to kind of pick those points where they have problems with your depreciation and then start that back and forth and you get 20 days to respond and you work with your accountant. And then as you push back a little bit, and if they still think they have an argument, then they bring in an engineer, an IRS engineer, right? Someone from their specialty to kind of give them back up.
Again, the ATG audit technique guide, that's their guide, right. So they read that and all of a sudden they're the expert and they're trying to apply and challenge the deduction. So they use the ATG and then if they need to, they have an engineer. And if it really gets and I've had this happen once, we all go together to the site, the IRS engineer and me, and we have a discussion and look through the building components. But I would say, you know, I have a better chance of winning the Powerball yesterday than that happening again. But we're dealing with.
Art Wiederman, CPA So, you know. Well, yeah, I think yeah. That Powerball is it looks really. What is it 1.6 billion between the Mega Millions and the Powerball.
Mark Rogers Did anyone won yesterday?
Art Wiederman, CPA You know, I didn't even look, I've been a little busy with all this PPP and HHS and ESPN and HBO and whatever they have going on here. So listen, Mark, your information is invaluable. Folks, this is a tool that we have as CPAs in our tool belts. If your CPA has not brought this to your attention, the first thing I think you should do, and this is easy, look at your depreciation schedule on your corporate partnership, individual tax return if you're schedule C.
If you've built out and you've got tens or hundreds of thousands of dollars in categories called leasehold improvement, building design, etc. And it's being depreciated over 39 years. What I would do is let's take a look at this. So, Mark, give one more time the email and the best way to get a hold of you and also the website if they want to kind of fill in some information.
Mark Rogers Right, so EideBailly.com. You can filter through to Fixed Assets Services. So again, my team does credits and deductions in the built environment. If you call it cost segregation, whatever you call it, we're going to find it, filter through the fixed asset services. And there's a quest for assessment form, you fill it out, it'll take you 5 minutes and I'll eventually get it. And if that's not working for you, my email mdrogers@EideBailly.com.
And I'll leave you listeners with this. We've talked about cost segregation and it being a no brainer. Looking forward, given what's happened in the Senate and the House and the presidency, watch out for energy incentives. There's going to be incentives for taxpayers to build and renovate energy efficiently. And we are already seeing some of those proposals from the House come in and applying it to some of our clients. And so look out for those in the next one or two years, there's going to be more incentives for you to go out there and build and create.
Art Wiederman, CPA We are recording this podcast at this moment it is 12:39 on January 20th on the East Coast. So we as of, I believe, 39 minutes ago, have a new president who has put out a 1.9 trillion dollar proposal. Now whether that's going to get passed is another conversation for another day. But yeah, I mean we've had actually doctors who have put solar on their buildings and there's a great credit for solar on your building if you're a dentist. Right.
Mark Rogers Right. Solar shows very well. You'll get that to a 5 year one hundred percent bonus in most situations, doesn't sit on your roof. There's a provision that just got passed last month. We won't get too much in the weeds, but it's called the 179D energy deduction. And it just got made permanent. It's one of those things that got extended every year. Now it's permanent. We could count on it being around for a long time and it's a buck eighty per square foot deduction if you build energy efficient. And if you think you don't build energy efficient, you think you have to go completely green and granola, that's not it. You're probably just building to code. You might already be building efficiently, you don't even know it. So just another thing to think about when you try to get as much out of your building deductions as possible.
Art Wiederman, CPA Mark Rogers, thank you so, so much for your time and your expertise. I mean, this is great information for our dentists. Again, we know what a difficult ten months it has been for you. Believe it or not, on March 16th, we're coming up on one year of this pandemic. It has been a year. As everybody and every commentator on TV and radio has said and the Internet like no other.
So if we can help you get some tax benefits from the government that are legal and perfectly proper, that's what we try and do. So Mark, hang on here before as I sign off, folks, if you want to get a hold of me in my office in Tustin, my phone number is 657.279.3243. My email is awiederman@EideBailly.com. Give me a call, send me an email if you have any recommendations for.
That's another thing I talk about is if you have a friend who's a dentist, or if you yourself have a really cool story, we're actually going to have a podcast of one of my long term clients who sold the same dental practice twice. It's kind of a cool story. He's going to be coming on in the next couple of months with us. We just talked the other day. You know, let me know. Let me know if you get somebody who's done something that really will help dentists, maybe a new invention, a new app or something like that.
If you're looking for a dental CPA www.ADCPA.org. We are the, Eide Bailly is one of the 24 firms and the ADCPA. Our website, like Mark was saying, is www.EideBailly.com. And you can go and find the information that Mark talked about and all the other things that we do. Go to our partner, Decisions in Dentistry www.DecisionsinDentistry.com. And if you want a complimentary consultation with one of us, fill in the boxes.
One more thing, folks. We are doing a yearlong webinar series with six Southern California dental societies. We have done the first two. We're doing another one. We're doing several in February. Go to our website if you want to register on the Business of Dentistry, on transitions and on for new dentists. We're doing a couple of those. That's www.EideBailly.com/dentalseries.
Well, folks, that is it for this episode of the Art of Dental Finance and Management. And remember what I say every single week, which is please be safe. Make sure that we remember the five words that I've said since the beginning of this thing. Failure is not an option. The dental profession has done very, very well. You really, really want to work on your business, not just in it. And we want to save your tax money. So hopefully this information today was helpful. So thank you for listening. Please tell your friends about the podcast. And this is Art Wiederman for the Art of Dental Finance and Management, signing off for today's episode. Thank you for listening and we'll see you next time. Bye bye.