Many dental practice owners are surprised to learn that one of the most powerful ways to reduce their tax burden is hiding in plain sight, within the walls of their own office. Dental facilities often include substantial investments in equipment, build outs, and improvements, all of which can be leveraged for immediate tax savings through a strategy called cost segregation.

Cost segregation allows practice owners to accelerate depreciation on certain parts of their property, dramatically reducing taxable income in the early years of ownership. The benefit? Increased cash flow when it matters most, as your practice is growing and reinvesting.

Let’s explore how cost segregation works, how much it can save, and whether it’s the right fit for your dental practice.

 

What Is Cost Segregation and How Does It Work?

Cost segregation is a tax strategy that separates the components of a building into different asset classes so they can be depreciated over shorter time frames. Instead of depreciating your building over 39 years (for nonresidential real property), you can reclassify portions of the property, such as cabinetry, lighting, flooring, and electrical systems, into 5-, 7-, or 15-year depreciation schedules.

Here’s how it works. When you purchase or improve a dental office, the entire cost is typically lumped into one long-term asset on your books. With cost segregation, a qualified tax engineering-based study is conducted to identify components that qualify for faster depreciation. This unlocks substantial deductions much earlier in the property’s life cycle.

 

Why Dental Practices Are Ideal Candidates for Cost Segregation

Dental offices are uniquely positioned to benefit from cost segregation because they often include a wide range of specialty equipment and interior build outs. These components, including dental chairs, X-ray equipment, plumbing for operatories, cabinetry, lighting, and soundproofing, can often be classified into shorter-lived assets.

We’ve seen many dental practice owners leave tens or even hundreds of thousands of dollars on the table simply because they were unaware of how much of their office could be reclassified.

Even practices that lease their space may benefit. If you’ve made significant tenant improvements (also known as leasehold improvements), you may be eligible for cost segregation on those buildout costs.

 

How Much Can You Save with Cost Segregation?

The tax savings from cost segregation can be substantial. While every case is different, a general rule of thumb is that 20% to 40% of a building’s cost can potentially be reclassified into shorter recovery periods. This leads to accelerated depreciation and significantly lower taxable income in the first few years.

Let’s say a dental practice purchases a building for $1 million. A cost segregation study may allow $250,000 to be moved into 5-, 7-, or 15-year property. That accelerated depreciation could result in over $80,000 in additional deductions in the first year alone, especially when paired with bonus depreciation.

 

What Are the Requirements for a Cost Segregation Study?

To claim the benefits of cost segregation, the IRS requires a formal study, typically conducted by a team of tax professionals, engineers, and construction experts. The study must follow specific guidelines and provide detailed documentation in case of an audit.

While some CPA firms offer high-level cost segregation estimates, we always recommend using a specialized provider with experience in dental offices. A well-documented report ensures compliance and maximizes your savings.

Cost segregation isn’t limited to newly purchased buildings. It can be performed retroactively on properties placed in service in prior years. This opens the door to “catch-up” depreciation, which allows you to claim previously unclaimed depreciation all at once, a massive benefit if you’ve never done a study on an older practice.

 

When Should You Consider Cost Segregation?

Timing is everything in tax planning, and cost segregation is no exception. There are several key scenarios where dental practice owners should seriously consider implementing this strategy.

If you’ve recently built, purchased, or renovated a dental office, cost segregation may offer significant savings. When the cost of construction or acquisition exceeds $500,000, the benefits of accelerated depreciation often far outweigh the cost of the study itself. For those who have owned their practice’s building for years without conducting a cost segregation study, it’s not too late. A “lookback” study can identify unclaimed depreciation from prior years and apply it immediately through a catch-up adjustment, without requiring amended tax returns. Cost segregation is also particularly useful in high-income years. If your practice has experienced a surge in profitability, this strategy can help offset income with large deductions, especially when used alongside bonus depreciation provisions.

Lastly, if you’re planning to sell or exit your practice soon, it’s important to understand both the benefits and implications of cost segregation. While the upfront tax savings are valuable, there may be depreciation recapture upon sale. This makes proactive planning and alignment with your exit strategy crucial to avoid surprises and optimize your after-tax outcome.

 

What Are the Risks and Considerations?

While the benefits of cost segregation are compelling, it’s not a one-size-fits-all solution. There are a few important considerations dental practice owners should keep in mind. First, there’s the potential for depreciation recapture when the property is sold. The IRS may require you to “recapture” some of the accelerated depreciation at higher tax rates. However, with proper planning, including advanced tax strategies like 1031 exchanges or installment sales, this taxable impact can often be reduced or deferred.

Second, there’s the initial cost of the study itself. Depending on the complexity of your property, a cost segregation study can range from $5,000 to $15,000 or more. That said, in most cases, the potential tax savings far exceed the upfront expense, making it a worthwhile investment.

Finally, documentation is key. A poorly executed or insufficiently documented study can raise red flags with the IRS. Working with experienced professionals ensures the study is both thorough and defensible, so your deductions are maximized and audit-ready.

 

How Cost Segregation Fits into a Broader Tax Strategy

We believe that cost segregation is just one piece of a broader tax planning puzzle for dental practice owners. When combined with other strategies, such as retirement plan contributions, S-corp salary optimization, R&D credits, and tax-efficient entity structures, cost segregation becomes part of a comprehensive tax plan to build and protect your wealth.

Dental professionals spend years building successful practices. Tax strategy shouldn’t be an afterthought. The earlier in the year you plan, the more flexibility you’ll have to implement strategies like cost segregation effectively.

 

Real-World Example: A Dental Office That Saved Six Figures

To illustrate the real impact, let’s look at a simplified example.

A dental practice in Texas purchased a $1.2 million building and invested an additional $400,000 in renovations. Through a cost segregation study, $450,000 of the total investment was reclassified into 5-, 7-, and 15-year property. This resulted in an immediate first-year deduction of nearly $180,000 thanks to bonus depreciation.

Not only did this reduce the owner’s taxable income significantly, but it also freed up cash flow that was reinvested into expanding the practice and hiring a new associate.

These types of outcomes are not rare, they’re simply the result of proactive tax planning.

 

Is Cost Segregation Right for Your Dental Practice?

Not every practice will benefit equally, but if you’ve invested meaningfully in your office, it’s worth exploring. The best way to know whether cost segregation makes sense is to work with a tax advisor who understands both the dental industry and the complexities of real estate taxation.

We help practice owners evaluate potential savings, weigh timing considerations, and coordinate with qualified providers to conduct compliant and effective studies.

 

Take the Next Step Toward Smarter Tax Planning

At Tavola Group, we specialize in strategic tax planning for dental professionals who want to keep more of what they earn and grow their practices with confidence. If you’ve purchased or improved your dental office in recent years, a cost segregation study could be the key to unlocking substantial tax savings.

Let’s explore whether this strategy fits your situation. Get in touch with Tavola Group today to learn more about cost segregation and other advanced tax planning strategies.