By Allen M. Schiff, CPA, CFE
For more on this topic, go to www.dentaleconomics.com and search using the following key words: dental equipment purchases, year end, depreciation, Section 179, Allen M. Schiff.
As the end of 2011 quickly approaches, many of you are asking yourselves, what can be done that will not only save the current year’s income taxes, but will also have a continuing benefit for your dental practice along with the associated delivery of your oral health care services?
You may want to consider some capital acquisitions. What is the condition of your dental equipment? Is the furniture in your reception area showing wear or is it from the 1970s? What about your operatories? Are they state-of-the-art or are they showing their age? Finally, what about the computer equipment in your front office? Most current software will not run on old computers. A Pentium IV computer with four gigabytes of RAM just doesn’t do the job in today’s high speed world.
You acknowledge that some of your equipment has seen better days. But what’s in it for you, you may wonder. That’s a valid question. On one hand, there is the intangible benefit of your patients seeing an up-to-date, state-of-the-art office. There is also the benefit to you, knowing that your equipment is new and will make your job easier, and perhaps allow you to do more dentistry in the same amount of time.
What are the tax consequences of purchasing new equipment?
There is an immediate tangible tax benefit of purchasing new dental equipment. Under the current 2011 income tax law it is like a Chinese menu, for there are various methods for depreciating qualifying equipment purchases under any of the following:
- Section 179 write-off — Up to 100% immediate write-off of your equipment
- 100% bonus depreciation — You may elect out of the 100% bonus depreciation
- 50% bonus depreciation — You may immediately write off 50% of the cost and depreciate the remaining 50% of the cost
- You may use normal depreciation over the equipment’s useful life
Below is a brief explanation of each depreciation method
Section 179 deduction — the maximum deduction for 2011 is $500,000. The Section 179 deduction is reduced dollar-for-dollar for qualifying equipment purchases over $2 million in 2011. The Section 179 deduction is on an asset-by-asset basis and not by the year-life class as mentioned above.
100% or 50% bonus depreciation is unlimited in amount and may cause a net loss. The problem with bonus depreciation is that it is “all or nothing” for equipment in a year-life class. A year-life class can be described in lay terms as all “computer equipment” or all “dental equipment.”
Bonus depreciation is available only to first use owners (new equipment). For leased equipment, that means it is available to the lessor and not the lessee. Section 179 is available for either new or used equipment. Unlike bonus depreciation, Section 179 deduction cannot create a net loss. To the amount that the Section 179 would create a net loss, that amount is carried forward and may be used in future years.
For example, assume you spent $300,000 for new dental equipment, including $125,000 for CAD/CAM equipment (this is all five-year life property), and $50,000 for new furniture in your reception area (this is all seven-year life property). Under the 100% bonus depreciation, you would either claim a deduction of $300,000 for dental equipment or $50,000 for your reception area.
In other words, the bonus depreciation is based on your year life property (five years and/or seven years). Under Section 179 you could elect to expense the $125,000 for the CAD/CAM and the remaining $225,000 would be depreciated normally. And, just to add another level of complexity, it is possible to claim Section 179 on certain assets and then bonus depreciation on the remaining assets.
An example of Section 179
Assume 2011 dental equipment acquisitions total $300,000.
Assume: Section 179 depreciation $300,000
Tax Savings (40% Tax Bracket) ($120,000)
= Net Cost, after 2011 Tax Savings $180,000
Your last option would be to elect out of the 100% bonus depreciation, not take any Section 179 deduction, and depreciate the equipment normally over its useful life. You may wish to consider this option if you have taken on considerable debt with respect to your equipment purchases. The future depreciation deductions will help provide a shelter to the cash needed to service the debt through income tax savings.
As you can readily see, there are a significant number of depreciation decisions available for 2011. It is likely that the best one for your particular case will be some combination of each of the methods discussed above. Be sure to consult with your dental CPA. He or she will be able to show you various solutions and help you decide which is best for you.
Allen M. Schiff, CPA, CFE, is a founding member of the Academy of Dental CPAs (www.adcpa.org). This group of very knowledgeable CPA firms across the nation specializes in practice-management services to the dental industry. Schiff serves on the ADCPA Executive Committee and is the chairperson of the ADCPA Marketing Committee. Reach him at (410) 321-7707 or at [email protected].
