Ch. 7, § 10. Capital Costs

(a) Depreciation. (i) The depreciation of a tangible asset is an allowable cost if: (A) The nursing facility currently uses the asset for patient care; (B) The asset is available for physical inspection; and (C) Included in the nursing facility's records. (ii) Basis. The basis used to calculate depreciation is the historical cost of an asset which is the cost incurred by the present owner in acquiring the asset and preparing it for its use. Generally, such cost includes costs that are capitalized under GAAP. For example, in addition to the purchase price, historical cost includes architectural fees, consulting fees, and related legal fees. (iii) Method. Depreciation must be reported on the straight-line method. (iv) Useful life. Useful life is determined in accordance with the most recent edition of Estimated Useful Lives of Depreciable Assets, as incorporated by reference and published by the American Hospital Association. (v) If a single asset or collection of like assets acquired in quantity, including permanent betterment or improvements, has at the time of acquisition an estimated useful life of at least two years and historical cost of at least the minimum amount utilized by Medicare for cost reporting, the cost must be depreciated over the useful life of the asset. (vi) Assets that do not qualify for depreciation must be included expenses in the year acquired. (vii) Donated assets. (A) Definition. An asset is donated to the extent the nursing facility acquired the asset without paying fair market value in cash, property, or services. (B) Basis. The basis of donated assets, except for donations from an entity related to the nursing facility, is the asset's fair market value minus the value the nursing facility paid for the asset. If the fair market value of the asset is over $2,000.00, the basis is the lesser of the appraised value and the fair market value. If the donor is related to the nursing facility, the basis is the lesser of the donor's net book value and fair market value. (C) Cash donations. Cash donations shall be treated as revenue, and not as an offset to expense accounts. (b) Permanent Financing Interest. Permanent financing interest is financing attendant to the acquisition of patient-related tangible assets. (i) Allowable cost. Permanent financing interest incurred on patient-related real property, improvements to real property, buildings, building components and equipment is an allowable cost subject to the limitations of this subsection. (ii) Investment income offset. Allowable interest must be reduced by investment income pursuant to the PRM. (iii) Cost reporting requirement. Interest expense must be supported by a written loan agreement showing that funds were borrowed, payment of interest and repayment of principal is required, and funds were used to purchase patient-related real property, buildings, building components, or equipment. The lender, purpose, principal amount, terms, and interest rate must be identifiable in the nursing facility's financial records. (c) Lease and rental expense. Lease and rental expenses incurred on patient-related real property, buildings, building components, or equipment are an allowable cost subject to the limitations of this section. (d) Related entities. If a nursing facility rents, leases or purchases patient-related real property, buildings, building components, or equipment from an entity related to the nursing facility, the cost must be adjusted to the actual cost incurred by the related entity. (e) Amortization of leasehold improvements. (i) Allowable cost. Lease or rental expenses incurred on patient-related real property, buildings, building components, or equipment are an allowable cost subject to the limitations of this section. (ii) Amortization of leasehold improvements must be calculated and reported in accordance with GAAP and are a capital cost. (iii) Amortization of organizational cost must be reported as an operating cost.