Wednesday, December 02, 2009
By Dan Schulte, J.D.
MDA Legal Counsel
From the November 2009 issue of the Journal
Question: I am told there are currently tax incentives available if I purchase new equipment for my practice or expand it by purchasing another practice. Can you explain these tax incentives to me? How long will they last?
Answer: If you have the resources or access to capital, now may be a good time from a tax standpoint to add new or replace old equipment or to expand your practice by acquiring another dental practice in an asset acquisition that includes equipment.
The incentive contained in Section 179 of the Internal Revenue Code (“IRC”) is not new. Section 179 has been in the IRC for many years. It has always allowed business owners to deduct the cost of equipment used in the business up to a maximum amount in the year the equipment is placed in service. Assuming there is taxable income and depending on other factors, this deduction is almost always more beneficial than the alternative — the alternative is depreciating the cost of the equipment and spreading smaller deductions over a period of years (five years for most types of equipment).
What is new is the maximum amount that Section 179 allows to be deducted. The 2008 Economic Stimulus Act increased the maximum amount that Section 179 allows to be deducted from $125,000 to $250,000 for 2008. The 2009 American Recovery and Reinvestment Act provided that the maximum amount stay at $250,000 thru 2009. Assuming no further tax law changes, for tax years beginning in 2010 this maximum amount will drastically reduced.
The advantages of this tax benefit can be illustrated with the following example. Assume your practice purchased new dental equipment for $100,000. Without the Section 179 deduction you would capitalize the $100,000 cost of the equipment and depreciate it over five years. In the first year, your deduction would be $20,000 (1/5 of $100,000). With the Section 179 deduction you can deduct the entire $100,000, so long as all the equipment was placed in service during the taxable year. It does not matter whether you paid cash for the equipment at the time of purchase or financed the purchase and are making payments over time. The deductions in this example would be the same. It also does not matter whether you purchased the equipment new or acquired it as part of the acquisition of another dental practice. The amount of the purchase price for the practice allocated to equipment is eligible to be deducted in full up to the maximum allowed.
Now assume that your practice has taxable income of $400,000 for the year. The chart on this page shows the actual tax benefit to you.
Any decision regarding your taxes should be discussed with your accountant or income tax return preparer. The amount of your practice’s taxable income, whether you are a C or an S corporation or a professional limited liability company, as well as other factors may effect the decision whether to fully utilize the Section 179 deduction.
However, anyone seriously considering replacing or adding new equipment to their practice or acquiring equipment as a part of the purchase of another dental practice should seriously consider closing the deal before the end of the year utilizing the Section 179 deduction. Congress may decide to extend the current $250,000 maximum for 2010 and future years in a continued effort to stimulate economic activity, or it could let it lapse.