Health care regulations are complicated—especially in a time when health care reform is a constant topic of speculation. Long-term care providers in particular have to balance cash flow concerns and changing laws with everyday business practices.
Finding ways to save money, enhance operations, and improve the bottom line isn’t simple. However, mechanisms are in place to help long-term care facilities benefit from the tax code—it’s just a matter of knowing they’re there.
The following five strategies could make an immediate impact on a provider’s financial health.
Fixed assets such as real estate are usually the dominant items on a company’s ledger. The IRS has allowances for depreciation of buildings and property; however, many organizations fail to recognize chances to increase depreciation, which can generate additional cash flow and reduce tax liability.
Cost segregation may be the answer. This IRS-accepted strategy frontloads depreciation deductions into the earlier years of a fixed asset’s ownership. The cost components of a facility are separated into alternate asset classifications as well as recovery periods for federal and state income tax.
This significantly shortens tax lives to five, seven, and 15 years rather than the standard 39 years for commercial properties and 27.5 years for residential income properties. Whether you’re building, remodeling, expanding, or purchasing a facility, cost segregation can lessen your income taxes and boost cash flow to help grow your business now.
Energy-Efficient Commercial Building Deduction
Section 179D of the tax code provides a financial incentive—up to $1.80 per square foot— to taxpayers who improve the efficiency of their commercial buildings above certain thresholds. A partial deduction of $0.60 per square foot, per system, is available for owners who reduce energy usage through interior lighting, a building envelope, heating, ventilation, or air conditioning. The deduction is based on the square footage of these improvements.
Taxpayers who haven’t utilized Section 179D can claim benefits from previous years. Qualified business owners with energy-efficient building components can declare missed deductions by applying for an accounting method change with their current tax return. It’s not necessary to amend previous returns.
Tangible Property Regulations (TPR)
A TPR analysis covers the building structure and nine key building systems separately, rather than the building as a whole. Certain principles are applied to determine if the expended amount must be classified as a capitalized improvement or whether it can be declared a deductible repair. Even if the amount must be filed as a capitalized improvement, businesses may still be able to benefit by electing a partial disposition loss on some components.
Fixed Asset Comprehensive Tax Scrub (FACTS)
Overlooking the proper capitalization of fixed assets could result in the loss of significant benefits—or worse, trouble with tax authorities. A comprehensive tax scrub can unleash gains and expose compliance risks. A FACTS engagement applies certain tax laws to fixed assets. The scrub could provide an immediate tax deferral by accelerating deductions on assets that were placed in service with incorrect tax lives or methods.
Explore Higher Tax Rates
The current tax rates may not be high for long. If your strategy is to hold short-term, you may want to consider the value of buying at a higher tax rate and selling at a lower one. The profitable sale of real property may be subject to depreciation recapture, either at capital gains or ordinary rates.
Investors who hold property for less than five years typically steer away from cost segregation due to recapture, but they may want to reconsider that strategy. Accelerating depreciation deductions at a higher tax rate then selling at a lower rate may increase profit.
Here’s an example: A real estate investor purchases a facility, holds it for three years, and is taxed at 43.4 percent (maximum tax rate of 39.6 percent plus net investment tax of 3.8 percent). Assuming the Trump administration will cut ordinary income tax rates and the investor sells in a year when rates are lower, he or she will recapture the accelerated depreciation at the lower ordinary tax rates. Assuming the highest ordinary rate goes down to 33 percent, the investor will realize a permanent tax difference of more than 10 percent.
We're Here to Help
Our team can help long-term care organizations navigate the tax code to find benefits. Contact your Moss Adams professional if you’d like to learn more about these and other ways to improve your tax strategies.