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Cost segregation is one of the most powerful tax strategies available to dentist building owners. But the strategy only works if you set it up in the right order, with the right professionals, and with airtight documentation. Here are the five implementation steps Wes Read walks through on The Dental Boardroom EP. 151.
This is the single most important step — and the one most often skipped. The LLC must be the purchaser on the deed. That means you need to form it before closing, not after.
Forming an LLC is not complicated. You can do it through LegalZoom for a modest fee. But if you are a practice owner collecting north of a million dollars per year, do not go cheap here. Hire qualified attorneys and advisors to set it up properly from day one.
If you already purchased the building in your personal name or inside your S-Corp, you can still transfer it into an LLC — but it requires the right type of attorney and creates additional tax complexity. Do it right the first time.
Once the LLC is formed, it closes on the building and obtains its own commercial mortgage. In nearly all cases, the bank will require you to personally guarantee that loan. That means if the LLC defaults, the bank can come after your personal assets — your home, vehicles, and non-retirement investments.
This is completely standard and should not deter you from the purchase. Dentists are considered low-risk borrowers, and commercial lenders are very familiar with this structure.
After closing, hire a qualified cost segregation firm — typically an engineering company, not your general CPA — to perform a room-by-room analysis of everything inside the building. Their job is to reclassify as many assets as possible from the standard 39-year depreciation category into the shorter 5-, 7-, and 15-year categories.
This study typically costs between $10,000 and $25,000. The fee is worth far less than the tax benefit it generates. Focus on finding a firm with deep experience in dental office builds, not on minimizing the engagement fee.
With your LLC in place and the cost segregation study complete, you now need a formal, written, arms-length lease agreement between your Dental S-Corp (the tenant) and your Real Estate LLC (the landlord).
To support the rent rate you choose, commission a market rent analysis from a licensed commercial real estate broker. This document is your protection in the event of an IRS audit. You can point to it and say: a qualified professional analyzed comparable properties and this is the rate they recommended.
Have a real estate attorney draft the actual lease agreement. Do not use a template. Do not do this yourself. The documentation must be airtight.
The final step — and an ongoing requirement — is maintaining completely separate financials for the LLC and the S-Corp. Separate bank accounts. Separate QuickBooks files. A clean Chinese wall between the two entities.
Every account you open — checking, credit card — requires its own general ledger account and monthly reconciliation. Keep it simple: most building LLCs need only a single checking account. The fewer accounts you have, the less complexity and the lower your accounting fees.
The moment transactions start crossing between entities without proper documentation, the strategy starts to unravel. Keep it clean from day one.
View Full Episode: https://podcasts.apple.com/us/podcast/151-cost-segregation-tax-strategy-for-dentists-part-3/id1518344747?i=1000761386035
Wes knows what's best for dental practices. He's been doing this for a long time and he sees lots of practices. He can tell me how our practice is doing, and what we can do to increase our productivity. With past CPA's, there were no ideas. It was all coming from me, saying "I think I can do better, but I don't know how." I come in to meet with Wes and he says "You CAN do better, and I know how."
PracticeCFO is in hundreds of dental offices around the country. They know what numbers should look like. They know what percentages of payroll, rent and supplies should be, and they will hold you accountable to those numbers, which will really help you stick to your plan and your path of growth and savings. That is invaluable
Whenever something comes up, whether it's building or practice related and we weren't sure where the numbers would go, PracticeCFO has been instrumental in helping us figure that out. I can't say enough of how important that is - that it goes beyond that initial partnership. They make sure this business marriage works.
When I go home from work, I don't spend a whole lot of time stressing about what my books look like, or how much I owe in taxes. By using PracticeCFO, the burden of keeping track of a lot of the big financial numbers and metrics are taken off my plate.
PracticeCFO helped me develop a plan for the future. I have colleagues that work with other accountants that don't have a plan - they just look at the numbers of the practice and that's it. There's no plan for 10, 20 years from now. But with PracticeCFO, you get that. PracticeCFO makes you feel like you're they're only client.
(In reference to his practice sale) What could've been super stressful, wasn't! When picking John and Wes, it was from word of mouth recommendations and other people's experiences from the past that really did it for me. And it turns out that those recommendations were right on the line.
Wes knows the business side of dentistry. His comprehensive plan will organize your personal and professional finances so you can focus on taking care of patients. Massive ROI.
I can’t say enough good things about everyone at PracticeCFO. Everyone on the team is professional, organized, knowledgeable, helpful and kind. They also respond to emails and phone calls immediately and are always happy to help. They have helped me navigate year-to-year as a business owner. PracticeCFO gives me peace of mind that my business is in good hands.
I love Practice CFO! They have helped me obtain a practice and maintain a practice. They are incredible people who are on top of everything and make owning and running the business portion of a practice easy. They couldn’t be better for my business and my sanity. They have every detail of the business and taxes taken care of where all I have to do is show up and follow their easy steps to success!
Practice CFO has the best tools I’ve seen for personal tax and financial planning in addition to top-tier corporate tax and accounting services. I have been very pleased with the level of quality service. They manage my monthly bookkeeping and accounts payable. It is a great system and saves me a ton of time, and it allows us to have monthly financial statements within a week of month end.
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