CREJ - Journal

53 / 76

March 4-March 17, 2015 — COLORADO REAL ESTATE JOURNAL — Page 5B
I n 1997, a landmark
decision in the case
Hospital Corporation
of America v. Commissioner
determined that businesses
could use cost-segregation
studies to compute depreciation
and, thus, decrease taxable
income.
Based on the ruling, cost-
segregation methodologies
previously used to allocate the
cost of a building between
structural components and
investment tax-credit property
can now be used for depreciable
assets.
By using cost segregation to
differentiate between building
and asset expenses, health care
entities can lower their owed
taxes, thereby increasing cash
flow. For example, rather than
applying a standard 39-year
depreciation to a medical
office building and everything
attached to it, the building
owner or administrator may
apply a shorter schedule
to items such as carpeting,
decorative lighting, specialty
outlets and, in some cases,
utilities. Doing so defers
payment related to their tax
burden and enables them to
retain more cash to put toward
immediate expenses.
To take advantage of cost
segregation, a health care entity
(such as a hospital, doctor’s
office, laboratory or long-term
care facility) must have taxable
income and must have spent
at least $500,000 for one of
three scenarios: purchase of an
existing building, construction
of a new building or completed
major improvements to an
existing property. In all of
these cases, documentation is
extremely important, so owners
and administrators should keep
careful records to share with tax
professionals.
n Asset eligibility
requirements. Let’s take a
look at what types of expenses
can and cannot be assigned
a condensed depreciation
schedule. Generally, anything
movable, dedicated to hospital
or business purposes, decorative
or easy to remove can be
considered a five-year asset.
For example, an ornamental
chandelier, though it provides
light, is not necessary for office
functioning, because other
lighting is available; therefore, it
may be considered decorative.
Electrical outlets meant for a
specific purpose that wouldn’t
be needed in a standard office
building (such as in a ceiling
for dental machinery) can be
considered dedicated. Some
plumbing fixtures, such as
emergency eye wash stations,
also can fall into this category.
Carpeting, because it’s easy to
remove, could be eligible for
the shorter tax life, while tile
flooring may not. Standard
lighting and restroom plumbing
that would be needed for any
type of office environment
would likely not be eligible.
Some items, such as power
outlets, may fall into a
questionable territory as they
could be used for dedicated
equipment but also standard
building equipment. Items
considered personal property
or that a business would take
with it if it moved, such as
chairs, tables, sofas, equipment
and computers, would not be
included in a cost-segregation
study.
n Cost-segregation studies.
The key to determining
which items are eligible for
accelerated depreciation is a
cost-segregation study, which
takes place after construction
or the purchase has been
completed. An engineering-
based study is the most accurate
and effective when identifying
and reclassifying property assets
to shorten the depreciation
time for taxation purposes and
reduce current income tax
obligations. The primary goal
of a cost-segregation study is to
identify all construction-related
costs that can be depreciated
over a shorter tax life than the
39-year building standard.
The criteria for classifying
assets is not always concrete,
so engineers and accountants
who provide this service tend to
use “generally accepted” rules,
rather than one particular code.
Two of our recently
completed cost-segregation
studies illustrate the potential
cost savings.
Medical Office Building
A. The cost to build Medical
Office Building A in Colorado
was very high because of its
rural location. As a result,
utilities and paving had to be
extended to the area. The total
project cost was $18.5 million.
The engineering-based cost-
segregation study revealed
that $2.5 million of assets –
Lawrence Knutson,
CPA
Tax partner, EKS&H, Denver
Ryan Sells, CPA
Audit partner, EKS&H, Denver
Typical Expense: Depreciation:
Specialized wiring 5 year
X-ray shielding 5 year
Internal communications systems 5 year
Dedicated plumbing 5 year
Vinyl wall and floor coverings 5 year
Accordion doors and partitions 5 year
Parking and landscaping, etc. 15 year