Cost segregation is the process of identifying and reclassifying assets within the construction cost from long-life real property, typically 39- or 27.5-year depreciable life, to a shorter depreciable life of five, seven, or 15 years. As a result, the building owner can accelerate depreciation deductions for tax purposes, which can help reduce taxable income and increase cash flow. FORVIS uses an engineering-based approach using construction costs, plans, and other documentation as well as property records, on-site visits, and discussions with engineers, or other knowledgeable persons concerning the purpose and function of the subject properties. The engineering approach is an accepted and approved method by the IRS. Cost segregation studies can be performed for:
- Newly constructed properties
- Improvements, renovations, and/or expansions
- Acquired properties
Properties that have been placed in service in a prior year can also benefit from a cost segregation analysis as the previously under-reported depreciation deductions can be caught up in the current tax year through a change in the method of accounting.
Within the healthcare field, cost segregation can be a valuable strategy for various types of real estate, including, but not limited to:
- For-profit hospitals
- Medical clinics
- Surgery centers
- Assisted living facilities
- Medical offices
- Rehab facilities
In addition, a cost segregation study can benefit critical access hospitals as it helps increase the depreciation expense by componentizing construction costs and assigning shorter depreciable lives than the standard 40- and 30-year life for buildings and their structural components. This results in accelerating depreciation, increasing the allowable capital costs reimbursed through Medicare.
A detailed engineering approach determines the asset’s recovery period for reimbursement purposes and inclusion in the Medicare cost report. This approach complies with the American Hospital Association’s (AHA) useful life guidelines. The recovery periods/lives in the AHA guidelines are determined by experienced representatives from healthcare systems and appraisal companies who are familiar with capital purchases and assets in the healthcare industry.
Healthcare-related real estate properties also are often good candidates for Section 179D, a commercial energy efficiency study.
FORVIS has a dedicated team of engineers, construction management, and accounting professionals with experience completing hundreds of cost segregation and commercial energy studies in the healthcare field. Please reach out to your FORVIS professional for a fee/estimate analysis.