Increasing ROI by saving tax dollars
When I read dental related articles or attend dental conventions and trade shows, the subject matter often focuses on the return on investment (ROI) of dental equipment and technology.
By Bob Creamer, CPA
When I read dental related articles or attend dental conventions and trade shows, the subject matter often focuses on the return on investment (ROI) of dental equipment and technology. Such discussions are usually centered on the direct relationship between the cost of the equipment and technology compared to the patient revenue earned by using the equipment and technology.
While these comparisons are informative and meaningful, there is another significant financial consideration often overlooked. This is the ROI on the initial acquisition of the equipment and technology.
When the dentist acquires a new piece of equipment or technology for the practice, current tax laws allow a tax deduction for its cost. The tax savings will depend upon the dentist's marginal tax rate. With the increase in the 2013 marginal tax rates, the tax savings can be significant.
For example, the top IRS federal tax rate increased from 35% in 2012 to 39.6% for 2013, on joint filers. Based upon income, the capital gains tax rate increased from 15% in 2012 to 20% in 2013. A long list of additional tax law changes can increase federal tax rates even higher. Just to mention a couple, there is a new Medicare surtax of 3.8% on investment income and an additional 0.9% tax once earned income reaches $250,000 for joint filers.
Taxes have been further increased by taking away tax deductions for items including personal exemptions, home mortgage interest, property taxes, state income tax, sales tax, charitable contributions, student loan interest, and even medical expenses. Depending upon the doctor's level of taxable income, the majority (in many instances all) of these deductions are no longer allowed. Therefore, income previously sheltered by these deductions is now fully subject to taxes.
Additionally, the majority of dentists do not qualify for certain tax credits such as the child tax credit and education credit. Finally, on top of all the federal taxes, you also must consider that many state and local government agencies have also raised taxes to gather needed revenues.
As I write this article, Congress is considering raising tax rates even higher and limiting additional tax deductions and credits. All of this means the dentist now has more taxable income in higher marginal tax rates.
Therefore, it is not unrealistic to assume that for many dentists, the investment in new equipment and technology will be deducted at combined rate (federal, state, and local taxes) of at least 40%, if not more. What does this mean for the dentist? It means that the dentist's taxing partners (the federal, state, and local taxing agencies) will also invest in the dental practice to a level of at least 40% of the cost of the investment.
So, if a dentist invests $50,000 in new equipment and technology, the dentist's out-of-pocket cost will be $30,000 ($50,000 x 60%) and the taxing authorities will put in the remaining $20,000 ($50,000 x 40%) by a direct reduction in the taxes the dentist would otherwise have paid.
As a result of the significant savings in the cost of equipment and technology by the reduction of taxes not paid, the ROI is significantly increased when comparing the final cost of the equipment and technology to the patient revenue it will generate.
When considering the ROI comparison, some might ask if it is correct to use the lower cost basis of $30,000 as their investment rather than the full $50,000. They base their question on the fact that if the equipment or technology were sold and the tax basis being zero, whatever the amount received on disposal will be income fully subject to tax. They are correct! The income received would be fully taxable.
But how often does a dentist purchase equipment and technology with the intention of turning around and disposing of it anytime in the near future?
Most dentists intend to fully use the equipment and technology they buy to help increase their production. Increased production almost always results in increased net profit. The increased profit pays for the investment many times over.
If, at some future date, the equipment or technology is sold, so be it! Some tax will be paid on the money received from the sale, but in the meantime the dentist will have gained the use of the money saved.
In 2013, we have some great tax laws allowing dentists to accelerate tax deductions when purchasing new equipment and technology for their practices.
Under Section 179 of the tax code, up to $500,000 of purchases can be fully deducted upon purchase and installation. A similar tax law allows for bonus depreciation of 50% of the purchase price regardless of the cost. Both of these laws are fully applicable, even if the equipment and technology purchases are 100% financed. The special tax laws are due to change at the end of 2013, unless Congress decides to extend them. The Section 179 deduction will be reduced all the way down from $500,000 to just $25,000, and bonus depreciation is set to go down to zero.
Therefore, 2013 is a window of opportunity that will close, and we may not see a similar opportunity for years to come. With these special accelerated tax laws and historically low interest rates, the acquisition of needed equipment and technology is easier today than it has been for many years.
I often hear dentists say they use the purchase of equipment and technology to reduce their tax burden. Further, they say they work with their CPAs at year-end to determine how much equipment and technology to purchase to reduce their taxes to a level they deem acceptable. I understand what they are saying, but I hope they fully understand the real reason for purchasing equipment and technology has little to do with taxes.
The primary reason for purchasing new dental equipment is that the equipment and technology will enable dentists to deliver the appropriate standard of care to their patients that will help build a relationship of trust. There needs to be a level of care that bonds patients to their dentists; a level of care that motivates patients to accept treatment recommended by their dentists; a level of care that patients will readily accept treatment from their dentists who are not in-network providers with their insurance plans; and a level of care that patients feel and know their dental needs are being met in the most effective, efficient, and least painful manner.
Purchases of equipment and technology are also made because they make delivering dental services more enjoyable for the dentist, as well as for the whole dental team. Also, new equipment and technology make the delivery of dental treatment more ergonomically friendly, both physically and mentally. The purchase of such equipment and technology will increase the practice production, which will increase the bottom-line profits. These profits can provide more benefits for the whole dental team now, as well as in planning for the future retirement of the team.
Dentists who understand the concepts above do not wait until the end of their business year to purchase equipment and technology to merely reduce taxes. These dentists make purchases when they need them. Often, such purchases will be made early in the year to take full advantage of the many nontax benefits throughout the whole year. Yes, ROI is important!
It is important to understand that there is an ROI on the initial purchase of the equipment and technology by having the taxing authorities pay their share of the purchase price. Then there is the ongoing ROI of comparing the after-tax investment cost with the production revenue to be earned by its continual use throughout the useful life of the equipment and technology.
Finally, there is an intangible ROI to consider that may be the most important – the ROI of how the equipment and technology will assist the delivery of the appropriate standard of care. Delivering care with the latest technology and equipment is not only profitable but enjoyable as well.
Dentists fully understand how to create treatment plans for their patients; they do that every day. Now they must expand their thinking to create treatment plans for their practices by identifying equipment and technology that will increase their production, increase their profit, and increase the enjoyment of delivering dental services. In so doing, they will strengthen the bond between their practices and their patients.
The treatment plan for the practice will include a plan for purchases to be made now, as well as projected dates for additional purchases. Such a plan will assist the dentist in taking the practice to the next level – a level that will bring not only professional clinical satisfaction but substantial financial rewards as well.
Bob Creamer is a CPA and president of Creamer & Associates, PC, an accounting firm in Salem, Ore. For the past 37 years, his firm has emphasized financial and retirement planning, dental transitions, practice enhancement, wealth creation, tax savings, and related accounting and consulting services for maintaining an efficient and profitable dental practice. He is a founding member of the Academy of Dental CPAs. Contact him via email at Bob@bestcpas.com.
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