Tax-Smart Depreciation on Pharmacy Buildings and Equipment
Employing tax-smart strategies for asset depreciation can help pharmacy owners take advantage of tax saving opportunities. In order to do so, it’s important that your real estate and pharmacy accounting is correctly set-up. In this video, Scotty Sykes, CPA, CFP® of Sykes & Company, P.A. discusses depreciation of assets for an independent pharmacy. He shares:
- How to manage depreciation for buildings and equipment;
- How independent pharmacies can accelerate depreciation; and
- Why pharmacies may not want to place their real estate in a separate LLC.
Check out other videos and articles where we discuss tax planning and mitigation under the TCJA and how independent pharmacies can take advantage of these tax laws.
If you prefer to read this content, the video transcript is below.
How can pharmacies better manage depreciation for buildings and equipment?
Depreciation is essentially where the IRS allows you to write off a cost of an asset over a period of time. And so that’s what you’ll see as depreciation expense on your profit and loss statement. It’s also amortization when it comes, the tangible assets, like goodwill. The IRS lets you write that off over a period of time. And congress has put in law where you can actually write off in year one, one hundred percent of that asset instead of maybe over a five, seven, fifteen, year period. And that’s Section 179 in bonus depreciation. So you do have a lot of flexibility here with depreciation, especially when it comes to tax planning, create losses and offsetting incomes.
How can pharmacies accelerate depreciation on buildings?
So, very powerful tool the IRS and congress has given you. Buildings have a unique opportunity, so if you own the building that you’re in, your pharmacy is in, typically that building is depreciated over a thirty nine year window. Which is a long period of time to recover that cost, if you’re looking at a million dollar building, that’s a very long time. What opportunities you have here are very powerful tax planning opportunities is a cost segregation study. And what that does is it breaks down the individual component parts of the building into electrical, into the structure, into shelving, into plumbing, and it’ll break everything down and you can put it into different sections where the IRS allows you to depreciate quicker so maybe it’s a five year, seven year, fifteen year depreciation period. And so you’re recovering that cost a lot quicker, you’re writing off income a lot faster and also you have the Section 179 in bonus depreciation opportunities that I mentioned previously.
Why should pharmacies avoid using a separate LLC for real estate holdings?
Now with cost segregation study, it’s not for every situation. Especially, or in most cases when it comes to the building is in a separate real estate LLC not a part of the pharmacy. In many cases the cost segregation study is not going to give you those benefits because, when you’re creating a lot of losses over here on the real estate entity you can’t really use those losses against your active income over here at the pharmacy. Very complicated situation with tax law. However, just be aware that, you may want to consider moving the real estate to your pharmacy to offset active income on the pharmacy that is depreciation offset income. Very detailed, complex tax planning opportunity here, but do be aware that regular check the box rules of a standard real estate LLC may not be what’s best for you. But you can always contact our office, we’d be glad to go over your depreciation schedule, your buildings, your situation and help you make the best recommendation on how to maximize this cost segregation, Section 179 in bonus depreciation of all your taxes.