2016 Update on IRS Section 179
What you need to know to benefit your practice
Growing a dental practice involves optimizing an efficient workflow, maximizing patient satisfaction, and maintaining a well-trained, skilled staff. Investing in new equipment and updated technology is a major component of long-term growth potential. While the financial investment involved in upgrading technology can be intimidating, there are tax advantages that may make these purchase decisions seem appealing to achieve your practice goals.
Depreciation is a way to write off the cost of an asset purchased for business use. This allows businesses to save tax dollars and assists in the replacement of assets or equipment that wears over time. For most dental equipment, depreciation takes place over 5 years, meaning that a dentist can write off a percentage of an equipment purchase every year for 5 years.1
In 2014, a tax extender bill called The Tax Increase Protection Act of 2014 (TIPA) gave certain expiring tax deductions that were part of a stimulus package, an extra year of life.1 This included Section 179, which allows a dentist to deduct the full purchase price of qualifying equipment and/or software that is purchased, leased, or financed from his or her gross income, including computers, software, vehicles, and office furniture.1-3 Certain restrictions apply to qualifying purchases (eg, vehicles must be over 6,000 pounds and software must be off-the-shelf rather than customized).3 Section 179 can be used to bring a dentist’s adjusted gross income to $0 but it cannot be used to create a taxable loss for the practice.1
Every year, renewed tax codes like Section 179 are updated and some of the rules and deduction limits change—so what does that mean for dentists in 2016?
Section 179 in 2016
The Section 179 2016 deduction limit is $500,000, which can be used on new and used equipment and off-the-shelf software.2 To qualify for the deduction, the equipment must be financed or purchased and put into service by the end of the day on December 31, 2016.2
There is also a spending cap on equipment purchases for 2016. Your practice can spend a maximum of $2,000,000 on equipment before the Section 179 deduction allotted for your practice is reduced on a dollar for dollar basis. This spending cap was put in place to ensure that Section 179 is a true small business tax incentive.2 Once the cap is reached, bonus depreciation goes into effect.
Bonus depreciation was created for businesses in lower Manhattan after September 11, 2001 in an effort to assist them in rebuilding. It has been adjusted and extended over the years after other economic slow-downs and certain natural disasters, such as Hurricane Katrina. It allows business owners to depreciate the allotted percentage of the adjusted cost on qualified purchases, such as dental equipment, in the year that it is placed into service.1 During the year of purchase, if different from the year that equipment is placed into service, and in subsequent years, the cost of the equipment and depreciation is adjusted for the additional first-year depreciation deduction.1
Bonus depreciationis is not offered every year. For 2016, the bonus depreciation is being offered at 50%, but it only applies to new equipment.2
How Do I Calculate My Deduction?
If you bought new equipment but don’t know what to do next, follow these simple steps. Calculate the deduction value of your equipment or software purchase by multiplying the cost of the asset by the percentage of business-use, which will yield the monetary amount that is eligible for Section 179. To qualify for the deduction, the asset(s) must be used more than 50% of the time for business purposes.2
Electing the Section 179 deduction is not automatic. You must fill out the appropriate form to elect the deduction when you file your tax return for 2016. The form to elect a Section 179 deduction is Part 1 of IRS form 4562. If you are more comfortable asking your tax preparer about the form, they might also advise you about any bonus depreciation savings that may apply to you for the year.
Remember to keep records of the equipment or software purchases that you plan to claim for the Section 179 deduction, including where it was purchased, the date it was acquired, and the date it was placed into service.4
Final Thoughts
Before you make any new purchases to upgrade your practice, it is important to consider your personal financial plans for the year, any potential federal tax deduction options, and the rules in your state that may or may not comply with the federal rules for Section 179. Certain dentists will have higher taxable state income than federal income if they decide to use Section 179. Your dental CPA can guide you in how to best utilize the deductions when upgrading your practice in a given year.1
Proactively planning and implementing practice upgrades can yield excellent results for your practice and long-term growth. Tax deductions and stimulus packages assist in the financial aspect of these purchases, but it is also important to remember your current financial situation and how you intend to grow your practice in the future through a long-term reinvestment plan.
References
1. Werhan JH. Tax Planning for 2015: A look at Section 179 and what it could mean for your practice. Inside Dentistry’s Practice Management Resource. 2015;11(suppl 2):22-23.
2. Understanding the section 179 deduction. Section 179 website. http://www.section179.org/section_179_deduction.html. Accessed May 24, 2016.
3. IRS Section 179 Tax Deduction—should you invest in new dental equipment? Inside Dentistry. 2013;9(11):34-36.
4. Electing the deduction. Section 179 website. http://www.section179.org/electing_section_179_deductions.html. Accessed May 24, 2016.
