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IRS Section 179: What Every Laboratory Owner Needs to Know
Information that laboratory owners can use while there's still time to act
The time may be right to invest in that pricey business equipment or software you’ve been eying. The reason for this is that in the 2013 tax year, the IRS Section 179 Tax Deduction—which applies to businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment—allows these businesses to deduct the full purchase price of qualifying equipment and/or software purchased, leased, or financed—up to a maximum of $500,000.
A remnant of the government’s economic stimulus bills, Section 179 of the IRS tax code was intended to provide tax relief for small businesses, although it benefits larger ones as well. Unlike depreciation, which spreads the deduction over a period of years, this provision allows businesses—including dental laboratories—to write off the total price (up to $500,000) on their 2013 tax return. In addition, businesses that exceed the $2,000,000 cap can write off 50% of qualified assets using the first-year Bonus Depreciation provision, which also enables small businesses that are not profitable in 2013 to carry forward the loss to future profitable years.
Given that Section 179 has undergone many changes—including a “stay of expiration,” when Congress instead decided in January 2013 to extend the provision slated to end after 2011 through 2013, retroactive to the 2012 tax year—there’s no knowing how much longer it will be available. This makes purchasing new dental laboratory equipment during this particular calendar year especially attractive for financial reasons.
Qualifying purchases include nearly all types of “business equipment”—such as computers, software, vehicles, and office furniture and equipment qualify, including property attached to your building that is not a structural component of the building, and items for “partial business use”—that is, equipment that is purchased for both business use and personal use, in which case, the deduction will be based on the percentage of time you use the equipment for business purposes.
Some restrictions apply; for example, vehicles must weigh at least 6000 pounds and software must be “off-the-shelf” (not customized).
Applying the Provision
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation, unless the business has no taxable profit in 2013 because the unprofitable business is allowed to carry the loss forward to future years.
Marlton, NJ, CPA Bruce Bryen, who specializes in accounting for dental professionals, describes the tax savings possible on, for example, a $600,000 qualified purchase using the provisions. After taking 100% of the first $500,000, he says, the Bonus Depreciation would kick in for 50% of the remaining $100,000, or $50,000; then normal depreciation of 20% for the first of 5 years would apply to the remaining 50%. “Out of the $600,000 purchase, you’re laying off the first $500,000+ $50,000 +$10,000—that adds up to $560,000 out of the original $600,000, which is over 90%.” For business owners, he points out, there are also savings on Medicare and Social Security as well as income taxes based upon the net business income.
Bryen, who strongly suggests that a financial advisor be consulted on all major financial decisions, adds that the specific savings amount depends on the company’s state, tax bracket, and company structure. (He says he advises his clients against the S Corp business structure—in favor of LLC or LLP—due to disadvantages such as inability to write off a loss that could result from this deduction because of a lack of basis.)
To those eager to pounce on the opportunity, Bryen says, “Section 179 offers small businesses a great opportunity to maximize purchasing power,” but warns that it’s not right for every business.
“Don’t do something strictly for tax reasons; make a smart business decision first, then work it into your tax planning. People need to remember that the write-off is the same whether you take it at one time or over the specified number of years according to IRS acceptable guidelines,” he says.
Bryen also reminds business owners that Section 179 is a one-time thing, so they should take care not to squander the opportunity—or, more to the point, the money. “Any kind of depreciation comes down to present value. It’s all a matter of the money you have today and what you plan to do with it.” For example, he explains, a financially sound move would be using the savings to pay down high-interest debt, thus guaranteeing the return on the interest no longer to be paid. However, he points out, the danger in taking the entire write-off at once is entering a vicious cycle where a cash-strapped business is nearly forced to buy new equipment specifically for the needed write-off.
Bryen further warns that a quick purchase may not qualify for the tax break because the equipment must not only be purchased but also be fully in use by the December 31, 2013 deadline.