A few years back, a colleague who advises medical professionals called me about a dental group that had just finished building a new clinic. They’d poured capital into everything: custom cabinetry, lead-lined imaging rooms, specialized plumbing, high-end dental chairs, the works.
But their CPA had depreciated the full buildout over 39 years, treating it all as standard commercial real estate. When I asked why they hadn’t done a cost segregation study, the answer was typical: “We didn’t think dental clinics qualified.”
That assumption could have cost them. Once we conducted a detailed engineering-based study, nearly 30% of the buildout was reclassified into 5- and 15-year assets, unlocking over $275,000 in tax savings in the first year alone.
Dental clinics are well-suited for cost segregation because they contain a high volume of short-lived assets. If you’ve built, renovated, or purchased clinic space, chances are you’re sitting on untapped tax savings.
Here’s how cost segregation works, and why it’s particularly powerful in dental practices.
Key Components in Dental Clinics That Drive Depreciation Acceleration
What makes a dental clinic so viable for cost segregation is the density of short-lived assets embedded in the property. Unlike a typical office building, dental clinics require extensive customizations and equipment, all of which can be separated from the building’s core structure and depreciated over shorter timeframes.
Common reclassifiable assets include:
- Dental equipment: Exam chairs, delivery units, imaging systems, vacuum pumps, and X-ray machines all typically qualify as 5-year property.
- Specialty electrical and plumbing: Operatories, sterilization centers, and imaging rooms often require dedicated electrical circuits and medical-grade plumbing. These improvements are often eligible for 5- or 15-year depreciation.
- Interior buildouts: Millwork, cabinetry, lead-lined walls, specialty flooring, soundproofing, and lighting designs are all good candidates for accelerated treatment.
- Leasehold improvements: Many dental clinics lease their space and invest significantly in tenant-specific improvements, which are prime targets for cost segregation.
In a well-documented study, these elements can comprise 20%-35% of the total project cost, offering substantial near-term deductions.
Tax Rules and Bonus Depreciation Relevant for Dental Clinics
Dental practice owners can take advantage of several accelerated depreciation tools, especially in light of recent legislative changes.
- Modified accelerated cost recovery system (MACRS) classification: Assets like equipment, custom finishes, and land improvements can be depreciated over 5, 7, or 15 years. Far shorter than the standard 39-year schedule.
- 100% bonus depreciation: As of January 19, 2025, full bonus depreciation is permanently available for qualifying assets placed in service under contracts signed on or after that date. This allows dental clinics to deduct 100% of eligible costs, such as equipment and interior improvements, in the first year.
- Section 179 expansion: Clinics can also expense up to $2.5 million in qualifying purchases under updated Section 179 limits, making it a useful complement to bonus depreciation for smaller investments.
- Grouping elections: For dentists who lease their building to their own practice, proper structuring can preserve cost segregation benefits. Done incorrectly, it can trigger passive activity limitations.
- Catch-up depreciation: Clinics that missed opportunities in prior years may still benefit through a one-time adjustment, often without needing to amend past returns.
What Reclassification Can Look Like in Practice
When a dental clinic invests in building or renovating a facility, the potential for accelerated depreciation can be substantial. Take, for example, a typical 4,800-square-foot clinic built in a high-traffic medical plaza with total costs of $1.6 million, including construction and equipment.
A cost segregation analysis of this scope might identify roughly $400,000 to $500,000 in assets eligible for reclassification into 5- and 15-year property. These often include items like dental chairs, cabinetry, imaging systems, specialty plumbing, and lighting.
If placed in service after the 2025 bonus depreciation update, the clinic could immediately deduct 100% of those qualifying costs in the first year. That kind of accelerated write-off can translate to well over $150,000 in tax savings. Cash that could be reinvested in hiring, expanding services, or paying down debt.
These numbers aren’t uncommon. They reflect the typical range we see in dental properties with specialized buildouts and equipment-heavy setups. The key is in the details: every component properly classified adds to the bottom-line impact.
Risks, Costs, and What to Watch Out For
Cost segregation offers compelling tax benefits, but like any strategy, it comes with considerations:
- Study cost: A high-quality, engineering-based study can range from $5,000-$15,000, depending on complexity. However, the ROI often exceeds 10:1.
- Audit risk: Cost segregation is IRS-sanctioned, but aggressive classification without documentation can lead to scrutiny. Partnering with credentialed experts with defensible methodologies is key.
- Depreciation recapture: On future sale, accelerated depreciation may increase the recapture tax owed. However, the time value of money generally still favors early deductions, especially if reinvested effectively.
- Suitability: Clinics with minimal buildouts or leased equipment may not see meaningful gains. A brief feasibility analysis can quickly determine ROI potential.
How to Implement Cost Segregation in Your Dental Clinic
A successful study begins with planning. Here’s how to approach it:
- Engage early: Ideally, start the process during construction or just after purchase. But retroactive studies can also be valuable.
- Provide documentation: Blueprints, contractor invoices, depreciation schedules, and equipment lists are crucial inputs.
- Choose the right team: Look for firms that combine tax expertise with engineering acumen. Avoid firms that rely solely on templates or rule-of-thumb calculations.
- Evaluate the numbers: Many reputable providers offer free feasibility assessments that are helpful for gauging whether savings will meaningfully outweigh the study cost.
How Tax Savings Translate Into Operational Growth
The value of cost segregation isn’t just in the tax deduction; it’s in what that deduction enables. By accelerating depreciation and increasing first-year deductions, dental clinics can unlock immediate cash flow. That liquidity often shows up in real business improvements.
In practices I’ve worked with, cost segregation savings have directly supported:
- Adding operatories or expanding to additional locations
- Upgrading diagnostic imaging and sterilization systems
- Increasing compensation or hiring clinical support staff
- Paying down equipment loans or lines of credit faster
Beyond the upfront cash, there’s also a planning benefit: more accurate asset tracking allows for better forecasting of future capital needs, replacements, and tax positioning. For growing clinics, that kind of clarity can be as important as the savings themselves.
Final Thoughts on Whether Cost Segregation Is Right for Your Clinic
For dental clinics with meaningful investment in property, equipment, and buildouts, cost segregation is more than a tax tactic; it’s a strategic advantage. The key is knowing when the numbers pencil out and having the right professionals guide the process.
If you’re serious about maximizing the benefit of cost segregation for dental clinics, it’s worth speaking to a firm that specializes in this work. R.E. Cost Seg provides engineering-driven studies tailored to healthcare and dental properties, offering the precision and strategy required to unlock real savings without compromise.
Ready to begin your tax savings journey?
