Client Profile
| Industry | Dental Practice (General & Cosmetic) |
| Annual Revenue | $1,800,000 |
| Entity Type | S-Corp (Practice) + Real Estate LLC |
| State | Arizona |
| Key Metric | $1.1M building basis, owner age 54 |
| Annual Tax Savings | $94,000 |
The Problem
This dental practice owner had purchased the building housing the practice for $1.1 million seven years prior. The building was held inside the same S-Corp as the dental operations, and the prior accountant had been depreciating it on a straight-line 39-year schedule. At age 54, the owner wanted to accelerate retirement savings beyond the standard 401(k).
The owner's net income from the practice was approximately $520,000. No cost segregation study had ever been conducted on the building despite significant dental-specific improvements including plumbing for operatories, specialized HVAC, cabinetry, and imaging equipment infrastructure.
AE Tax Strategy
1. Cost Segregation Study Under IRC §168
We commissioned an engineering-based cost segregation study on the $1.1 million building. The study reclassified $385,000 in building components to shorter recovery periods: $165,000 to 5-year property, $88,000 to 7-year property, and $132,000 to 15-year property. Because the building had been in service for 7 years, we filed a Form 3115 under IRC §446(e) to claim the catch-up depreciation as a Section 481(a) adjustment, producing a one-time deduction of approximately $290,000. Tax savings from the catch-up: $110,000.
2. Real Estate LLC Separation Under IRC §162(a)
We transferred the building to a newly formed real estate LLC that leased it back to the practice at fair market rent of $9,500 per month. This created a deductible rent expense under IRC §162(a) for the practice. Going forward, this structure produces approximately $14,000 in annual tax savings.
3. Defined Benefit Plan Under IRC §401(a) and §404(a)(7)
We implemented a defined benefit plan under IRC §401(a) alongside the existing 401(k). The actuarially determined annual contribution was $168,000, which combined with the 401(k) maximum brought total annual retirement deferrals to over $191,500. The ongoing annual income tax savings totaled approximately $80,000.
Before & After Comparison
| Tax Category | Before | After | Savings |
|---|---|---|---|
| Cost Seg Catch-Up (One-Time) | $0 | $110,000 | $110,000 |
| Entity Separation (Annual) | $0 | $14,000 | $14,000 |
| Defined Benefit Plan (Annual) | $8,700 | $88,700 | $80,000 |
| Total (Annual Ongoing) | $8,700 | $102,700 | $94,000 |
Key Takeaways
- Dental offices contain a high concentration of 5-year and 7-year property due to specialized plumbing, cabinetry, imaging infrastructure, and HVAC — cost segregation is almost always beneficial.
- Buildings already in service can still benefit from cost segregation through a Form 3115 catch-up — there is no statute of limitations on this correction.
- Separating real estate from operating entities provides liability isolation, estate planning flexibility, and income allocation opportunities.
- Defined benefit plans allow contributions far exceeding 401(k) limits, especially for owners over 50 — the actuarial calculation often permits $150,000 to $250,000+ per year.