Top Five Tax Planning Strategies for Long-Term Care Organizations

by Jason Thompson, Partner, Credits & Incentives

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.

Cost Segregation

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.

Jason Thompson has practiced public accounting since 2003. He provides federal and state taxation services to a variety of clients with special emphasis on issues involving tangible property and renewable energy. Jason can be reached at (425) 317-3051 or

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Moss Adams LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Moss Adams LLP assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided. The material appearing in this presentation is for informational purposes only and is not legal, accounting, tax, or investment advice, as an endorsement of any party or any investment party or any investment product or service, or as an offer to buy or sell any investment product or service. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moss Adams Wealth Advisors LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. All opinions expressed are those of Moss Adams Wealth Advisors LLC. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including but not limited to, an accountant-client relationship or advisor-client relationship. Although these materials may have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information, as the views and solutions described may not be suitable for all investors.

© 2017 Moss Adams LLP