Hanging with Hafen: How to save money at tax time

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Mar 29, 2011

As part of the annual tax process, I’ve recently done some reading on cost segregation analysis. For the uninitiated, this is the method by which you can save millions (if you’re Donald Trump) on your tax bill by taking accelerated depreciation on your building, furnishings, and equipment. For the big boys like Trump, this process works, but like many tax strategies, you need money to make or save money. More specifically, you need a high-powered accountant with knowledge and expertise in cost segregation analysis.

Unfortunately, Dan the Tax Man, who does my taxes and in the off months raises organic produce, doesn’t know cost segregation analysis from broccoli. So I’m reduced to saving money in other ways.

To make things even more interesting, the U.S. government, in its infinite wisdom, has actually established the expected rate of entropy for all of your possessions. Depreciation schedules are nothing more than the expected life span of any particular object. This leads me to reflect on the value of building a project or buying equipment. So let’s take a look at the U.S. government’s take on obsolescence.

You can’t depreciate your land. If you bought land where you should have, it should be appreciating. But if your land is depreciating, I’d recommend you dump that piece of ground and find a new piece. A veterinary practice won’t thrive in a neighborhood that’s trending downward. When buying land, you’re better off buying the very smallest parcel in a neighborhood that’s trending upward than buying a big parcel in a market that’s flat or declining.

Equipment specific to retail sales and services can be depreciated in five years. This also extends to computers, cash registers, coolers, retail shelving, signage, and equipment installation. From my point of view, this seems to make sense, because retail furnishings and equipment are often very trendy.

Office furnishings, equipment, and personal property can be depreciated in seven years. The “burn rate” on furnishings and medical items like imaging and lab equipment is pretty fast. It’s easy to see why when you look at how rapidly technology evolves and how quickly things become obsolete. The most progressive veterinary practices have a rolling replacement budget to continuously replace and upgrade equipment.

Site improvements are depreciated in 15 years. This includes parking lots, sidewalks, landscaping, patios, and trash enclosures. Many practice owners underestimate the obsolescence of these features, but take a minute to look around your site. Many veterinary practices have cracks in the sidewalk, potholes in the parking lot, or dying landscaping. I’d suggest that, much like you should have a rolling budget to replace equipment, you also have a rolling budget for restoring and enhancing your site. Curb appeal is the first thing people notice about your practice.

Your building and built-in furnishings are depreciated in 39 years. This is the typical depreciation schedule most veterinary practice owners are familiar with. Thirty-nine years does seem like a long time. And often when I’m talking to a veterinarian about renovating or replacing his facility, he’s reluctant to say that the building seems to be falling apart after just 20 years of payments. But in many cases, a building older than 20 years is just plain worn out.

In contrast to your home, which is allegedly appreciating, your veterinary hospital may be on the road to becoming worthless. Think of your building as a taxicab—a machine for making money. And like a cab with 300,000 miles on it, your building with 30 years of wear and tear needs to be replaced.

If you have a smart accountant, hopefully you can use this information to save yourself money. And if that’s the case, be sure to have your version of Dan the Tax Man confirm this information before you act on it. I’m an architect, after all—not an accountant. For the rest of us, depreciation schedules can help us realize the difference between treading water and swimming the distance. The bottom line is that the current is always moving, so to make progress you have to swim against it harder than it pushes you back toward the shore.

Veterinary Economics Editorial Advisory Board member Mark Hafen, AIA, is a founding member of veterinary design firm Animal Arts in Boulder, Colo.