IRS Section 179 Tax Deduction—Should You Invest in New Dental Equipment?

What dentists need to know while there’s still time to act

The time may be right to invest in that pricey business equipment or software you’ve been eyeing. 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 practices—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 already been extended once (it was slated to end after 2011, but Congress granted a “stay of expiration” through 2013, retroactive to the 2012 tax year), there’s no knowing how much longer it will be available. This makes purchasing new dental equipment during this particular calendar year especially attractive for financial reasons.

Qualifying Purchases

Qualifying purchases include nearly all types of “business equipment”—such as computers, software, vehicles, and office furniture and equipment, including property attached to your building that is not a structural component of the building. Also included are 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 an unprofitable business is allowed to carry the loss forward to future years.

Marlton, New Jersey, Certified Public Accountant Bruce Bryen, who specializes in accounting for dental practices, 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 more than 90%,” he says. 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 in advance of all major financial decisions, adds that the specific savings amount depends on the company’s state, tax bracket, and company structure.

Caveat Emptor

To those eager to pounce on the opportunity, Bryen says Section 179 offers businesses “a great opportunity to maximize purchasing power,” but warns that it’s not right for everyone.

“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,” he notes. 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 buying 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.

If you have been researching a major purchase and preparing to make a final decision, now may be the time to investigate how the Section 179 deduction may fit into that equation. Time spent now may yield significant benefits.