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The best way to understand cost segregation is to run the numbers. In Episode 151 of The Dental Boardroom, Wes Read walks through a real-world example using a dentist collecting $1.2 million per year. Here is how the money flows.
Start with the dental practice, which operates as an S-Corporation:
● Collections: $1,200,000
● Clinical expenses (labor, labs, supplies, marketing, admin): $600,000
● Rent paid to the Real Estate LLC: $170,000 ($14,167/month)
● Net K-1 income to the dentist: $430,000
The $170,000 in rent is fully tax-deductible inside the S-Corp. It reduces the dentist's taxable K-1 from what would have been $600,000 down to $430,000 — a direct reduction of taxable income.
Now look at what happens inside the building LLC:
● Rental income: $170,000
● Mortgage interest (deductible portion): $80,000
● Net income before depreciation: $90,000
Without cost segregation, the dentist might take a standard depreciation deduction of $40,000 to $50,000, leaving $40,000 to $50,000 of taxable income from the LLC.
With cost segregation applied in year one: $200,000 of depreciation.
● $170,000 rent income
● Less $80,000 mortgage interest
● Less $200,000 cost segregation depreciation
● Net result: a loss of $110,000 in the LLC
The dentist owes zero taxes on the rental income. The rent is, effectively, tax-free income.
That $110,000 loss does not disappear. Under normal passive activity rules, it is suspended and can only offset future passive income. But there is an exception.
If the dentist's spouse qualifies as a real estate professional — working more than 750 hours per year in real estate activities, with real estate being their primary professional activity — all passive losses from the LLC can be used to offset any income, including the $430,000 K-1 from the dental practice.
The result: the dentist is effectively paying taxes on $320,000 of income instead of $430,000. That is a six-figure reduction in the tax base, entirely legal, and powered by a building the dentist already owns.
The cost segregation strategy does two things simultaneously. Inside the S-Corp, the rent payment lowers K-1 taxable income dollar for dollar. Inside the LLC, the depreciation generated by the cost segregation study wipes out the rental income — and then some. If the spouse qualifies, the excess loss flows through to reduce dental practice income as well.
This is not a loophole. It is a deliberate part of the tax code, available to every dentist who owns their building and structures it correctly.
Listen to Episode 151 of The Dental Boardroom Podcast: 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."
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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.
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