It’s widely known that few service professions carry an entry barrier as high as that of dental practices, mainly due to the need for high-tech equipment. Fortunately, there are significant tax benefits available that allow dentists to greatly lower the net-of-tax cost.
Even if no financing is involved and the related outlay is made in the year of acquisition, the cost of equipment is deducted through depreciation over a long period of time – generally five to seven years. Below is an outline of several methods of greatly accelerating these deductions:
The deduction with a Section 179 election is capped at $500,000 per year and is reduced if the total such acquisitions exceed $2,000,000 in that year. Deduction timing is not determined by date of acquisition or payment. The deduction is available only during the year the asset is placed in service and can include equipment bought with credit that remains unpaid at year-end.
Bonus depreciation is similar to Section 179, however it allows only 50% of the cost to be deducted in the year placed in service – the balance is depreciated over the asset’s tax life (five to seven years). Section 179 is now permanent, where bonus depreciation exists only through 2019, and the initial write-off of 50% is reduced to 40% for 2018 and 30% for 2019. Bonus depreciation may be used only by the taxpayer to first place assets into service. Used equipment does not qualify.
De minimis Election
Each year, taxpayers may choose a capitalization threshold that allows immediate deduction of each asset that costs less than that threshold. Taxpayers who issue audited financial statements may choose a threshold from $0 to $5,000; others may choose a threshold from $0 to $2,500. This is allowed for tax purposes only if also applied for financial statement purposes. It also must be applied to all assets under the chosen threshold. Assets not deducted under this method (because they exceed the cost threshold) remain eligible for Section 179 or bonus depreciation.
Repairs to existing equipment will qualify for immediate deduction. Different from prior year, this is the case even if the value is increased or the useful life is extended. Unlike other categories, there is no flexibility here. If the criteria are met, the repairs deduction must be used.
This is only an overview of some of the complex rules, so feel free to contact a dental specialist at BerganKDV with questions.