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    3 things dentists need to know about year-end purchases

    Planning ahead with a Dental CPA can save dentists and their equipment vendors a lot of stress at year-end and ensure that this important rule can be properly adhered to.

    With year-end approaching it is time for dentists to think about making equipment and technology purchases if they want to expense (depreciate) those assets on their 2016 tax return.

    While the rules for depreciating equipment have changed dramatically, one thing remains constant. Equipment must be “placed into service” before any depreciation may be taken. Planning ahead with a Dental CPA can save dentists and their equipment vendors a lot of stress at year-end and ensure that this important rule can be properly adhered to.

    In case you missed it, on December 18, 2015, Congress passed and the President signed into law the "Protecting Americans from Tax Hikes (PATH) Act of 2015.”  You can read about the legislation in the January 20, 2016 edition of Dental Practice Management in my article entitled, What Dentists Need to Know About Taxes in 2016

    1.  Depreciation 

    Depreciation is a deduction designed to enable business owners to recover the cost of equipment and certain other property used in their trade or business. It is an annual allowance for the wear and tear, deterioration, or obsolescence of that property. The concept goes back to the industrial age for accounting purposes. Early corporations – largely the railroads – needed a way to report positive income to attract investors. By spreading the cost of capital assets over time instead of reporting the expense in one year, corporations were able to report more consistent profits. Then, in 1913, along came income taxes. 

    Related reading: How to time major purchases to improve your tax position

    There are dozens of formulas for calculating depreciation for tax purposes and various kinds of property are assigned different useful lives over which they are depreciated. Dental equipment and technology are typically depreciated over 5-years. Furniture and fixtures (dental cabinets) 7-years; certain (qualified) leasehold improvements 15-years; and other improvements including buildings & structures (not land) are depreciated over 39-years. Timing is important in the selection of a depreciation method. If more than 40% of one’s annual expenditure for tangible (depreciable) property is placed into service after October 1st of a calendar year, the amount of depreciation allowed for that year is severely limited.  Planning one’s expenditures over the course of a year is critical and may include the use of accelerated methods for calculating depreciation. 

    2.  Section 179 

    Of particular interest to dentists and their vendors was the reinstatement of and making permanent the $500,000 expensing limit on Internal Revenue Code Section 179 depreciation. While most dentists would not need to accelerate depreciation to this extent, it is nice to know that a large amount may be deducted if it make good business and tax sense. For example, if a dentist purchases new technology such as a computer system, digital radiography – X-ray machines, sensors, etc., for $80,000, and has to spend $20,000 for cabling and installation, she may deduct the full $100,000 this year under Section 179. Alternatively, to manage her tax brackets and maximize the benefit of the deduction, she may chose to take $25,000 of Section 179 and depreciate the remaining $75,000 over 5-years. Why waste the deduction in a 25% or 28% tax bracket if you know you will be in the 35% or 39.6% brackets going forward? Speaking of tax brackets, Section 179 may not be used to create a taxable loss in one’s business. If a dentist’s net income is $50,000 and they elect Section 179 of $100,000, then $50,000 is utilized this year bringing the net income to zero, and the remaining $50,000 is carried forward and deducted the following year, to the extent there is taxable income, as opposed to being written off over 5-years.  Another limitation may exist for dentists practicing in corporations.  Section 179 depreciation, and taxable losses, are only deductible in corporations to the extent that corporation has “basis” or equity.  Here is the math:

    Dr. White’s Corporation: 

                Beginning Retained Earnings          $ 50,000

                Add:  Net Income                                100,000

                Less:  Distributions                             - 80,000

                Ending Retained Earnings               $ 70,000

    Section 179 Election                                         25,000

    Remaining Basis or Equity                           $ 45,000

    Dr. White has no problem with basis and may deduct $25,000 under Section 179.  Then there is Dr. Black who takes excessive distributions from his corporation:

    Dr. Black’s Corporation: 

                Beginning Retained Earnings          $ 50,000

                Add:  Net Income                                100,000

                Less:  Distributions                           - 160,000

                Ending Retained Earnings               $ -10,000

    Section 179 Election                                          25,000

    Remaining Basis or Equity                           $ -10,000

    Dr. Black’s Section 179 deduction is not allowed and will be carried forward until there is sufficient basis. 

    J. Haden Werhan, CPA/PFS
    Feel free to contact J. Haden Werhan, CPA/PFS, principal and owner of Thomas Wirig Doll, an accounting and wealth management firm that ...

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