What dentists need to know about taxes in 2016

January 20, 2016

J. Haden Werhan, CPA/PFS

Article

Tax extenders! They have been in the news every year since the expiration of the Bush tax cuts and various other tax and economic stimulus packages. Without the passage of tax extenders in recent years, dentists would have had higher taxes. These temporary tax provisions expired at the end of 2014 but, as expected, new tax extender legislation has been passed.

On December 18, Congress passed and the President signed into law the "Protecting Americans from Tax Hikes (PATH) Act of 2015," and the "Consolidated Appropriations Act, 2016," funding the government and providing a number of significant tax changes. The most notable aspect of this legislation is that unlike previous tax extender packages, the PATH Act makes most of the provisions permanent – and retroactive for 2015. Most notable for dentists, and their good friends who sell dental equipment and technology, are the rules for writing off those purchases.

Here are some of the highlights:

Section 179

The Act retroactively extends and makes permanent the $500,000 expensing limitation and $2 million phase-out amounts. Both the $500,000 and $2 million limits are indexed for inflation. Without the PATH Act, Section 179 would be limited to $25,000 and the phase-out amount $200,000. If one exceeds the phase-out amount in any given year, they are not eligible to use Section 179 that year.

For dentists building new offices, the $200,000 phase-out limit was a significant problem. In addition, qualified leasehold improvements (see below) are eligible for the Section 179 deduction. The dollar limit was $250,000 but the PATH Act removes that ceiling starting in 2016. So, a dentist who made qualified leasehold improvements in 2015 may take a Section 179 deduction of up to $250,000. For improvements made in 2016, the limit is the same as above - $500,000.

There are a variety of factors and rules to take into account when contemplating the use of Section 179 including one’s tax situation, the amount of debt taken on to making those improvements, and, for those dentists with S. Corporations, the income and basis in the corporation.

More on Section 179: Congress passes Section 179 extension ... what that means to you and your dental practice

Leasehold improvements

The Act retroactively extends and makes permanent the inclusion of qualified leasehold improvement property in the 15-year depreciation schedule. Qualified leasehold improvements are those made by or for a lessee, not an owner/user. Dentists who rent space will depreciate improvements over 15 years but those who own their space (dental condo, free-standing building, partnership interest, etc.) must still use a 39-year depreciation schedule.

Therefore, it is important for such owners to have a Cost Segregation Study performed to re-allocate improvements into shorter depreciation categories as appropriate. Also starting in 2016, The 2015 PATH Act removes language in the tax code that excludes air conditioning and heating units from being Section179 property. Previously, HVAC units were depreciated over 39 years.

Continue to page two for more...

Bonus depreciation

The immediate expensing of new assets placed into service that have existed in a variety of forms since 2001 will end after 2019. In recent years through tax extenders, Bonus Depreciation has been 50 percent of qualified purchases. It will be 50 percent for 2015, 2016 and 2017 before going down to 40 percent in 2018 and 30 percent in 2019. To be eligible for bonus depreciation, property must be tangible depreciable property with a life of 20 years or less, computer software, or qualified leasehold improvement property. Also, the original use of the property must commence with the taxpayer meaning that used equipment doesn't qualify.

The PATH Act makes the following tax attributes permanent:

The American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education.

The $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom. The $250 is indexed to inflation and may now include professional development expenses.

Pre-tax mass transit limits will be permanently set equal to the pre-tax parking benefit limits. The change is retroactive for 2015. As a result, the allowable pre-tax mass transit limit for 2015 increased from $130 to $250 per month. The monthly mass transit limits for 2016 will also increase to $255 per month.

The option to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes.

The increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.

The provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70.5 or older.

There is much more included in the new legislation. It suspends, for two years, two new taxes that were installed as part of the health care reform law: (1) the excise tax on medical devices (which was effective for sales after Dec. 31, 2012) won't apply to sales between Jan. 1, 2016, and Dec. 31, 2017; and (2) the 40 percent excise tax on high-end health insurance plans, known as the "Cadillac tax," which would have applied beginning in 2018, will instead apply for tax years beginning after 2019.

Continue to page three for more...

The exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income is extended through 2016. The new law also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016. The deduction for mortgage insurance premiums deductible as qualified residence interest is extended through 2016 as is the above-the-line deduction for qualified tuition and related expenses. The $8,000 increase in first-year depreciation cap for business automobiles is restored and extended through Dec. 31, 2019.

As for solar energy property, the new legislation extends the temporary 30 percent energy credit for solar property from its current expiration after Dec. 31, 2016, for three additional years through 2019. The energy credit for solar energy property will then be phased out, providing a 26 percent credit in 2020, and a 22 percent credit in 2021. For any property that is under construction before 2022, but not placed in service before 2024, the energy credit is reduced to 10 percent. Similarly, the new law extends the temporary credit for solar residential energy-efficient property.

Like any new tax legislation, The Path Act of 2015 and the Consolidated Appropriations Act of 2016 consist of volumes of text. In addition to the good tax news for dentists outlined above there is other good news associated with these bills. First, the fact that the legislation was written, passed by both houses, and signed into the law in such a short period of time and with so little partisanship and fanfare, is encouraging from a political standpoint. Second, because so many of the tax extenders were made permanent, there is much less for politicians to argue over in the future.

Lastly, with the uncertainty about how much dentists can deduct when purchasing new equipment and technology, or building new dental offices removed, planning for those purchases and the related tax results will be much easier for dentists and their dental CPA’s.