Brian Hufford, CPA, CFP®
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Income tax planning no longer exists. Benefitting from current tax laws is more like playing Speed Bingo until a ticking oven timer rings.
Did you start the new year with an overwhelming compulsion to spend $1 million constructing, improving, and equipping a new office? If so, 2011 is the year for you. You have a winning card if you can get the pieces down before the timer rings. Dentistry is uniquely situated to benefit from favorable deductions for capital expenditures that exist in 2011 and 2012. This column will show you how. I hope you are into speed reading.
IRS Section 179 allows dentists to expense purchased equipmen that would normally be depreciated over a number of years. This expensing privilege started at $25,000 several years ago, and has increased almost annually as the economy has softened with the intent to motivate small businesses to purchase equipment.
For 2011, Section 179 has been increased to $500,000 (not a misprint) for new or used equipment that meets legal requirements. Current provisions … tick, tick … will expire Dec. 31, 2011.
Section 179 expensing is currently scheduled to drop to $125,000 in 2012 and revert to $25,000 in 2013. Normally, real estate expenditures do not qualify for expensing. Under the new law, certain qualified leasehold improvements for dental office build-outs qualify for Section 179 expensing if the building meets certain criteria. If you are lucky enough to have constructed and equipped a new office this year, Bingo!
As if expensing $500,000 of equipment under Section 179 in 2011 weren't enough, Bonus Depreciation also is available. Bonus Depreciation is a fairly recent concept that allows purchasers of new equipment to deduct an additional 50% of the cost.
For 2011, bonus depreciation has been increased to 100% of qualified equipment cost. It then will drop to 50% in 2012. So to further benefit players of Speed Bingo, dentists can play an unlimited number of cards for each game.
One can begin to sense the overwhelming tax-savings potential for building out and equipping a new office project in 2011. It's too bad that there is so little time to plan and benefit from these provisions. In effect, these tax law changes seem more like a lottery than tax incentives.
While income tax planning no longer exists, entity planning and financial planning do. The Speed Bingo cards of the new tax law come with some significant fine print. Most dentists practice as S Corporations. To achieve the large tax benefits currently available for capital expenditures, dentists who practice in a corporate form must conduct significant prepurchase planning.
Dental S Corporations are not friendly with achieving large equipment deductions because of complicated basis provisions. A dentist could purchase $500,000 of equipment in his or her S Corporation eligible for Section 179 expensing, merely to learn that none of the deduction flowed through to the dentist's personal income tax return due to basis limitations in an S Corporation.
Entity issues are the most significant barrier in dentistry to achieving large tax deductions for capital expenditures, both for office building and equipment expenditures. It is imperative to conduct significant planning prior to any large purchase of equipment if you practice in a corporate form.
Finally, while equipment expenditures are a winning Bingo card for income tax reduction, they are also a ticket to the poor house for dental retirement planning. You need to save at least 20% of your income each year. The two biggest saboteurs of annual retirement savings are equipment expenditures and rapid debt reduction.
Having tax and debt reduction as a primary financial planning goal is the surest way to be unsuccessful in planning for retirement. Suppose you need to purchase $50,000 of equipment this year, and that you want to stay out of debt. There are dual incentives if you can afford to pay cash for the equipment: You could save $20,000 of federal and state income taxes in the combined 40% brackets by expensing the equipment, and you could avoid incurring more debt by paying cash.
However, if you also need to save $50,000 for retirement this year and are unable to do that because of the equipment purchase, you have simply added one more year to the working treadmill. You can pay zero taxes, be completely out of debt, and still be broke if you have no savings.
This year is a hot year for tax savings, but don't save so much tax that you sabotage your retirement.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].
