By Allen M. Schiff, CPA, CFE
The end of 2012 is quickly approaching. Normally, we as dental CPAs are able to compare the tax effects of an action between the current year and the next. This year, however, that’s not possible; there are just too many unknowns about tax positioning in 2013.
Acquisition of new equipment has many advantages. Yes, there are tax advantages that we will explore in detail later in this article. First, there are psychological benefits for you, the dentist, as well as your patients. For example, the first thing your patients see when they enter your office is your reception area. Is the furniture a bit stale? Is your color scheme straight out of the 1970s? Just think how new furniture would make you and your patients feel when entering your office. And just think what new patients sense when they enter your office for the first time. A new look will certainly say a lot for you, your team, and your practice’s image.
The same can be said for the dental equipment in your operatories. A properly equipped operatory with modern equipment conveys to patients that you care enough about them to have the most up-to-date equipment for your oral health-care services. A properly equipped dental operatory will also assist in case presentation and may help increase overall case acceptance. The bottom line is that your office décor, including the condition of your operatories, must be in line with your marketing strategies and vice versa so the patient does not get a mixed message.
So, you may be wondering, what are the tax advantages from the purchase of new dental equipment?
First, in order to get any benefit, the equipment must be placed in service by Dec. 31, 2012. That means the equipment must be delivered, installed, and ready to be used in your dental practice by that date. Since most dental practices operate on the cash basis of accounting, the equipment invoice must be paid — either with a check or in-place financing or a credit card charge — dated Dec. 31, 2012, or earlier.
There are three different ways to recover the cost of your new equipment using tax depreciation — Section 179 expensing, 50% additional first-year depreciation, and regular depreciation. Each method has its own advantages and disadvantages. Let’s explore them together.
The Section 179 expense allows you to write off (depreciate) the entire cost of equipment in the year of purchase. For 2012, the maximum expense write-off is $139,000. To the extent that your purchase of Section 179 eligible property exceeds $560,000 in 2012, the maximum expense is reduced “dollar for dollar” in excess of $560,000. For example, if you were to purchase $570,000 in equipment, you have exceeded that cap by $10,000 ($570,000 to $560,000). This would reduce your maximum Section 179 deduction by $10,000, giving you a maximum expense of $129,000. With Section 179, you can cherry-pick which equipment you wish to expense and you may also use only a portion of the purchase price. You do not have to use all of the $139,000 Section 179 depreciation. The Section 179 expense cannot produce or increase a loss. Any unused Section 179 expense may be carried forward and used in the future. Barring action by Congress, for tax years beginning in 2013, the maximum expense is $25,000 and the maximum equipment cost is $200,000. Section 179 expense may be claimed on both new and used equipment. This is what creates some uncertainty, pending a new tax bill being passed this fall, as the Bush tax cuts expire on Dec. 31, 2012.
The 50% additional first-year depreciation (also called bonus depreciation) is the default. Unless your dental CPA elects out of it, you must take bonus depreciation on all eligible acquisitions during 2012. Unlike Section 179, bonus depreciation is “all or nothing” based upon the recovery year class (typically three, five, or seven years). Current tax regulations require you to take it, or elect out of it, for all assets in a recovery year class. For instance, if you have both five-year and seven-year class acquisitions, you can take bonus depreciation on the five-year assets (dental equipment) and elect out of it on the seven-year assets (reception area furniture). With 50% bonus depreciation in the year of acquisition, you depreciate 50% of the cost plus the regular depreciation expense on the other 50% remaining balance. The balance is depreciated over the remaining class life. Bonus depreciation may create or increase a tax loss. There is no limitation on the amount of bonus depreciation you may claim. Barring extension, bonus depreciation expires Dec. 31, 2012. (Equipment purchased Dec. 31, 2012, qualifies. Equipment purchased Jan. 1, 2013, does not qualify.) Bonus depreciation is available only for new and not used equipment, the reason being Congress was looking for a methodology to stimulate the economy.
Regular depreciation spreads the depreciation deduction over the life of the asset. Five-year assets are depreciated over five years. Seven-year assets are depreciated over seven years. Unlike Section 179 and the 50% bonus depreciation, there is no large deduction in the year of acquisition. However, you do get a full deduction in each year until the equipment is fully depreciated. Like 50% bonus depreciation, regular depreciation may create or add to a tax loss. By spreading the depreciation deduction over the life of the related asset, you are spreading the tax savings over the life of the asset. Should you have debt within your dental practice, this will help provide a shelter for your cash flow for the period you are servicing the debt.
Below is an example of all three methodologies, assuming you have acquired $150,000 in dental equipment during 2012.
