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    How to time major purchases to improve your tax position

     

    Pitfalls and problems

    Each doctor will have different strategic needs for tax planning, and each deduction or depreciation method has its pros and cons. While Section 179 can look very appealing at first blush, it may not be the best instrument.

    “One is whether or not the equipment you’re buying is financed,” says Werhan. “The reason for that is if you buy equipment and have a five-year loan, and take Section 179 and write off the equipment in the first year, you get a big write-off that year, but your loan is going to continue. You’ll deduct the interest for taxes, but the principal that you repay is paid with after-tax dollars. So what you’ve done is you’ve terribly mismatched the deduction with an after-tax cost of buying that equipment.”

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    Willeford advises against using Section 179 just for the sake of lowering one’s tax liability.

    “The other pitfall is that the dentists are often using this, because they have a huge tax burden, because their CPA never projected their taxes earlier in the year. However, what they do not realize is if they take it all now, they may be hurting themselves in the long run, because they are using all of the deduction in the current tax bracket, yet their income should increase over the next four years. When it does, they may be in higher tax bracket, and wish they still had that tax deduction.” 

    From there, using Section 179 can have a deleterious, snowball effect.

    “Once you get in the habit of using that Section 179 every year, and buying equipment at the last minute, the dentists often feel they have to keep doing it,” says Willeford. “Otherwise they’re going to have another big tax bill, because they’ve used up all that equipment deduction in Year 1. What I normally do is I look at the client’s financial situation, and what we think their tax bracket is going to be in the next five years, to then help them decide, does it truly make sense to use the full tax deduction now, or should we purposely spread it out over five years, or whatever the life is of the asset.”

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    Timing is everything

    In order to use the provisions of Section 179, doctors can’t wait until the last minute before deciding to buy something. In order to be claimed, the equipment has to be in use – not just purchased – before the end of the year.

    “It has to be placed into service,” says Werhan. “And placed into service is sort of a technical term from the tax code, meaning that the equipment has to be being used in order for it to be written off. For example, if you go to the ADA meeting in November and buy equipment, pay for it, go home, and the equipment gets installed in January the following year, you don’t get the deduction for that current year. It’s in the next year, because it hasn’t been put into service.” 

    Likewise, if equipment is put into service by November, but the bill doesn’t arrive until January or February, that deduction can still be taken.

    “When you buy it and pay for it has zero effect on when you can write it off,” says Werhan.

    “You have to plan ahead enough so that the equipment can be placed into service before the end of the year.”

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    Continue to page four for more..

    Robert Elsenpeter
    Robert Elsenpeter is a freelance writer and frequent contributor to Dental Products Report and Digital Esthetics. He is also the author ...

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