Capitalize on Your Equipment Purchases
Understanding the IRS’s Section 179 deduction
Roger P. Levin, DDS
How would you like to receive a $40,000 tax deduction for 2017? That would probably greatly reduce or maybe even eliminate any taxes owed by your practice. You could receive this deduction if you purchased equipment that cost $40,000 in total and put it into use this year. Wait, you say you've invested even more in your practice this year? Well, that's even better. According to the US Internal Revenue Service's (IRS) Section 179 deduction, you can spend up to $500,000 on equipment, including software, and get an equivalent tax deduction for that same tax year. For example, if you purchased a new CEREC machine and put it into use this year, you may be able to deduct the full cost for 2017.
The Section 179 deduction was created to spur small business investment. Throughout the years, Congress has changed the amount—raising it, lowering it, and even eliminating it. For now, the $500,000 amount is in effect, but tax laws can change. With a new administration, the potential exists that the amount could be altered or eliminated in the future.
Investing in Your Practice
With the exception of dental school, your practice is the best investment you've made in your career. However, for it to accrue value, you must continually reinvest in it. During some years, you focus on the smaller stuff, such as repainting the reception area and landscaping the exterior. In other years, you may need to buy new computers and software, replace dental chairs, or purchase diagnostic equipment. If it's one of those years when a big purchase is looming, check with your accountant and keep the Section 179 deduction in mind.
However, a tax deduction—no matter how significant—should never be the sole deciding factor for upgrading or replacing anything in your practice. Before you make a major purchase, you should first analyze the potential return-on-investment (ROI). If you invest $40,000 in clinical equipment, how soon would you be able to recoup that money? Some of the questions to consider include the following:
What type of treatment does the equipment enable you to provide?
What is the fee for the treatment?
What is the profit margin for the treatment?
How many times will the treatment be performed annually?
What are the benefits with regard to patient care, treatment results, customer service, efficiency, and quality control?
What are some of the hidden costs in terms of training, maintenance, software upgrades, and space utilization?
Why is this year the best time to make the purchase?
These are just some of the factors that you should consider before making a purchase. Although receiving a significant tax deduction definitely counts as a benefit, as a practice owner, you need to weigh all of the pros and cons.
What Is It?
Section 179 is part of the tax code. It serves as an incentive for small business owners, including dentists, to invest in their businesses. Section 179 enables you to take a deduction equal to the full price of any equipment purchased (currently up to $500,000 in a tax year), as long as the equipment was purchased and put into use in that same year.
How Does It Work?
Instead of depreciating the value of the equipment over a number of years, you get to do it in a single tax year. This not only reduces your taxes, but it also discounts the price of the item. For example, if you spend $40,000 on equipment, your Section 179 deduction also would be $40,000. Assuming a 35% tax bracket, the savings on your purchase would be $14,000, lowering the effective cost of the equipment to $26,000.
Which Purchases Qualify?
Section 179 covers a wide range of new and used equipment, including diagnostic and clinical equipment, software, computers, office furniture, and dental chairs. These items must be for your business and not for personal use.
Which Businesses Qualify?
The deduction is intended for small businesses. If a company spends more than $2.5 million on equipment, then it does not meet the IRS's definition of a small business and is ineligible for the deduction.
What Else Do I Need to Know?
Tax laws are complex, even the ones that appear more straightforward. Use this article as a starting point, then speak to your accountant or tax advisor to find out what the best strategy is for your unique situation. If you have already invested or are thinking about investing in new equipment or renovations, then the Section 179 deduction could be a boon to your office.
If you aren't sure whether you qualify for this deduction, please consult your accountant or tax advisor. Although Section 179 offers a potentially significant tax deduction for practice owners, it's up to you to ensure that any deductions taken are allowable under current IRS tax laws. Additional resources are available online at: www.irs.gov/publications/p946/ch02.html and www.section179.org.
The comments in this article are not meant to be taken as legal or tax advice. Please consult with a certified professional when making tax decisions for your personal situation.
About the Author
Roger P. Levin, DDS, is a third-generation general dentist and the founder and CEO of Levin Group, Inc. Visit levingroup.com for training and consulting options.