October 29, 2008 | Web Exclusive
The break down on new equipment and taxes
Don’t be lured by the tax breaks alone. Major equipment purchases should benefit operations along with the bottom line.by Noah Levine
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Photo: Getty Images
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Generous tax breaks are available on big-ticket equipment purchases, but if the write off is the main motivation and the new gear doesn’t improve the care provided to patients, these purchases will not be wise investments.
A practice with no use for the new equipment and no plan for money saved on taxes might be better off staying away from the marketplace. However, practices looking to expand, add new high-tech services or dentists looking to build a new business will find the current tax structure very favorable. Bruce Bryen, CPA, a partner with dental finance experts The Snyder Group and managing partner of dental accountants Bryen and Bryen, LLP, said there’s a number of reasons dental practices invest in equipment, and taxes certainly figure in those decisions.
“You should be buying it for the motivation of increasing the revenue in the practice, smoothing the flow of patients, updating equipment that might be obsolete or getting obsolete,” Bryen said. “You wouldn’t want to do it just because it’s giving you a tax benefit. It should make sense to buy it.”
Section 179
| | Section 179 explained
| | 2008 equipment purchases (Total spent on new equipment in 2008)
| $400,000
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First year Section 179 write off
(Maximum Section 179 benefit for 2008) | $250,000
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Stimulus plan bonus depreciation (50% of remaining $150,000 value)
| $75,000
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First year depreciation (20% of remaining 75,000 value to be depreciated over 5 years)
| $15,000
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Total Year One tax deductions available (Assuming a 35% tax rate, this equals $119,000 in tax savings)
| $340,000 |
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The full value of most equipment purchased for a business can be written off as tax deductions. Usually these write offs are taken over five to seven years until the full purchase price has been deducted, but since 2003 businesses have been allowed to deduct the entire purchase price for some items on taxes paid for the year of the purchase. These deductions are covered under Section 179 of the tax code, and Bryen said 2008 is a great year to take advantage of these benefits.
“When people talk about all the depreciation breaks that they get, the incentives for buying the equipment and writing it off fast, most of the time they’re thinking about Section 179. For 2008 the deductions have doubled, and that’s a major thing,” he said.
Bryen explained that the code caps the amount of equipment expenses that can be claimed as depreciation deductions under this section. In 2007 the cap was $125,000 and in 2008 the cap increased to $250,000. In addition, the recent economic stimulus legislation awarded an extra bonus that allows businesses to deduct an additional 50 percent of their equipment purchases up to $800,000. This means if a practice spent $400,000 on new equipment, it could write off $250,000 under Section 179 plus an additional $75,000 under the stimulus plan.
Tax advantages
This system is designed to spur major equipment investments, and Bryen said the ability to recoup new equipment’s deprecation value all at once can be more beneficial than taking the same deductions over a number of years. However, the full depreciation value can only be deducted once, so practices that claim the full value for the year of purchase lose the ability to take an annual depreciation deduction for that equipment in future years.
Unlike when individuals get personal loans or financing, business taxes allow for the full deduction of money spent on finance charges. This means a dental practice that finds favorable finance terms can start using new equipment and save money on taxes upfront.
“You could borrow $250,000, write off $250,000 and you might not have to start paying for this until 2009,” Bryen said.
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