Tax Planning for 2015
A look at Section 179 and what it could mean for your practice
J. Haden Werhan, CPA/PFS
There have been no new tax laws since President Obama signed HR 5771, The Tax Increase Protection Act of 2014 (TIPA), into law on December 19, 2014. In addition to making several temporary tax cuts permanent, TIPA was a “tax extender” bill that gave several expiring tax deductions another year or life. This included Section 179 and its provisions concerning depreciation of equipment and/or software that is purchased, leased, or financed. Discussed in more detail below, Section 179 and its provisions are extremely important for dentists, dental supply companies, and the economy. A big question for dentists today is whether or not those tax saving provisions will be extended again for 2015.
What is Section 179?
Depreciation is the systematic write-off of the cost of an asset used for business purposes that enables businesses to save tax dollars and afford the replacement of assets that wear out. Most dental equipment is depreciated over 5 years.
Rather than depreciate the value of equipment or software over a period of years, Section 179 allows a dentist to deduct as an expense the cost of new or used tangible personal property placed into service in their practice during the tax year up to a specified amount. Although it may not be used to create a taxable loss for one’s practice, Section 179 may be used to bring a dentists’ income to $0. Any amounts that may not be deducted because of this limitation may be carried forward to succeeding tax years. In addition, the amount remaining after the election of a Section 179 deduction may be depreciated over the lifetime of the property.
It is important to note that many states do not comply with the federal rules for Section 179. This means that in those states, dentists who elect to use Section 179 will have higher taxable state income than taxable federal income. Your dental CPA can advise you if Section 179 is advisable for your practice and and how much you should use in any given year.
A Look at the Limits
Tax Extender bills are nothing new. Prior to TIPA, there was The American Taxpayer Relief and Accountability Act of 2012 (ATRA). The maximum amounts that could be expensed under Section 179 before ATRA were $139,000 in 2012 and $25,000 in 2013. ATRA extended this maximum expensing amount to $500,000 for 2013 (and retroactively for 2012). ATRA also extended for 2 years the provision that up to $250,000 of “qualified leasehold improvements” were eligible for expensing under Section 179 or for 15-year depreciation, as opposed to the normal 39 years. This was especially important for dentists who were building new offices. Although the definition of qualified leasehold improvement is complicated, dentists who leased the premises for their dental office and made new improvements were generally eligible. Owners of a space who made those same improvements were not qualified for this provision and must take depreciation over 39 years.
Thanks to The Hospital Corporation of America vs. the IRS Commissioner (1997), dentists are able to separate certain personal property from the real property to shorten the depreciable lives of those assets from 39 years to between 5 and 15 years. This includes plumbing and electrical from the point it enters the premises to the point it is attached to operatory, laboratory, and sterilization equipment. These are treated like an installation expense and capitalized with (added to the cost of) the equipment to which it is attached, thereby enabling it to be classified as 5-year property.
“Bonus Depreciation” was created after September 11, 2001, to assist businesses in lower Manhattan in their efforts to rebuild. Originally 100%, it was adjusted to 50% and extended over the years after Hurricane Katrina and during economic slow-downs. Bonus Depreciation was scheduled to expire at the end of 2012 before ATRA was enacted.
Bonus Depreciation allows the option of depreciating 50% of the adjusted basis (cost) of “qualified property,” but only in the year it is placed into service. In the year of purchase (if different) and subsequent years, the basis of the property and the depreciation allowances must be adjusted to reflect the additional first-year depreciation deduction.
Generally, an asset qualifies for Bonus Depreciation if: normal depreciation rules apply and it has a life of 20 years or less or it is a qualified leasehold improvement as explained above and its original use commences with the taxpayer.
Tax Year 2015
Assuming there are no 2015 tax extenders, Section 179 will be $25,000, depreciation of leasehold improvements will revert to 39 years, and the 50% Bonus Depreciation will be gone for the 2015 tax year.
Many dentists may have already reached the Section 179 limit or will by the end of the year. If a dentist purchases exactly $25,000 of equipment in 2015, and chooses to, she may deduct the full amount under Section 179 or depreciate it over 5 years. As previously mentioned, depreciation starts when the asset is “placed into service.” For example, If you go to ADA 2015 in November and purchase a new computer system but don’t fire it up and start using it until January, the depreciation starts in 2016. On the other hand, if you took delivery of new x-ray equipment soon after the ADA meeting and paid for it on January 1, 2016, the depreciation starts in 2015. Say you don’t need the deduction this year and decide on regular 5-year depreciation. If the radiography equipment was your only purchase for the year (in the fourth quarter after ADA), you are subject to a different depreciation formula than if the equipment was placed into service prior to October 1. The rule is that if more than 40% of total purchases for the year occur in the fourth quarter, the first year depreciation is 5% of the equipment cost. If less than 40% of the purchases occur in the fourth quarter, then the first year depreciation amount is 20%.
I would hate to see doctors rush out and spend $100,000 on equipment between now and the end of the year in anticipation of tax extenders hoping for a big write-off. Under current law, if this $100,000 represented the total cost of equipment for the year, the depreciation deduction for 2015 would be $28,750 ($100,000 - $25,000 for Sec. 179 = $75,000 x 5% = $3,750 + $25,000 = $28,750).
There are a lot of other rules and formulas for depreciation, but the “placed into service” issue is paramount. If you are going to run a year-end fire drill with your dental supplier, make sure the placed-into-service rule can be feasibly adhered to. Mechanical, operatory, or other smaller equipment items that could be (or could have been in the event of an audit) delivered to your practice and installed before year-end represent reasonable items. Technology equipment that has to be built, tested, shipped, and then installed and tested again, would be a poor choice, since the likelihood of placing it into service (using it on patients) by year-end is very low. Personally, I don’t care for fire drills—especially at year-end. Having talked to many dental supply company sales folks over the years, I can tell you that they hate the fire drills also. The sales are good, of course, but I believe the dental suppliers prefer a well thought-out plan for practice modernization including equipment and technology that is integrated. I prefer this approach as well.
Proactive planning ensures a much better outcome from a practice growth and long-term viability standpoint as well as from a tax and financial point of view. So instead of adding stress to your holidays, and those of your dental supplier and CPA, schedule a strategic planning meeting with them and map out a long-term reinvestment plan for your practice. The depreciation will fall into place.
About the Author
J. Haden Werhan, CPA/PFS, is an owner and partner with Thomas Wirig Doll and provides strategic financial planning and wealth management. He has extensive experience managing, consulting, and providing accounting services to dental practices ranging from start-ups to acquisitions to large group settings. For more information, visit http://twdadvisors.com.