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Taxes and 179 expensing

January 14, 2019

By Jennifer Garvin

Dentists who own and operate practices who have purchased or financed equipment during the calendar year, may elect to take the Section 179 deduction when filing their taxes in order to maximize their savings.

Internal Revenue Service Code Section 179 allows business owners to deduct the purchase price of equipment and/or software put into service during the year.

Image of Tax reform graphicIn 2017 the ADA successfully advocated to ensure the dental profession benefits from the tax reform law that passed Congress. The Tax Cuts and Jobs Act was the first major rewrite of the U.S. tax code in more than 30 years and contained many changes that could affect dentists' financial planning. With the 2019 filing deadline approaching, the ADA News is featuring a series of articles focusing on how the new law will affect dentists beyond the revised standard deductions. The first article in the series ran Dec. 10 and discussed the Student Loan Interest Deduction.

ADA News talked with Allen M. Schiff, a certified public accountant and president of the Academy of Dental CPAs, to see what dentists need to know about 179 expensing. Mr. Schiff is the president of the academy, which is made up of 24 dental CPA firms representing more than 9,000 dental practices.

ADA News: Who is eligible to use 179 expensing form?

Mr. Schiff: Any dental practice filing a U.S. Business Income Tax Return in 2018 is eligible to elect the Section 179 deduction so long as they acquired the equipment during 2018 and it was placed in service and installed by Dec. 31, 2018. I highly encourage you to use this deduction if you paid for the equipment with cash and without incuring any long-term debt (financing).

Certain types of equipment may also be eligible. You can use Section 179 with a dental chair and unit, digital X-ray, computer software, computers, etc. This equipment also applies towards the Bonus Depreciation deduction, discussed below.

ADA News: What are the limits? What are examples of a purchase?

Mr. Schiff: A dental practice can deduct up to $1 million in equipment purchases during 2018 as long as the total purchases of equipment during 2018 did not exceed $2.5 million. If you elect to use the Section 179 Depreciation, you cannot create a tax loss in the year of such tax election. With the Bonus Depreciation, you can create a tax loss.

ADA News: How is the 2018 form different from previous years?

Mr. Schiff: For 2018, you can now use both new and used equipment for Section 179 as well as Bonus Depreciation. In the past, this was not available as only new equipment applied to Section 179 whereas Bonus Depreciation allowed both new and used equipment acquisitions.

ADA News: What's the difference between the Section 179 and Bonus Depreciation deductions?

Mr. Schiff: There is a lot of confusion over the difference between Section 179 and Bonus Depreciation. Many dentists use these tax strategies, but they may not be aware of the differences, because a CPA can achieve the same result. Let's take a look at the difference.

Let's assume the dental practice has a net income prior to any Depreciation decision of $100,000. With both Bonus and Section 179, you could bring the net income down to zero. With Bonus depreciation, you could even create a tax loss. This is not available with Section 179.

How is this accomplished? Here are two examples:
Example 1
Bonus
Sec. 179
Net income  $100,000  $100,000 
Depreciation  ($50,000)
 
($50,000)
 
Taxable income  $50,000  $50,000 
On the surface, these two concepts look the same. Let's go one step further:
Example 2
Bonus
Sec. 179
Net income  $100,000  $100,000 
Depreciation  ($120,000)
 
($100,000)
 
Taxable income  $20,000    None
You may ask, how is this possible? What causes one concept a loss of $20,000 and another to break even with no taxable income? The difference between Section 179 and Bonus Depreciation is as follows: Section 179 allows the dentist to choose which equipment (asset) they choose to deduct as a Section 179 Depreciation, whereas Bonus Depreciation uses an "Asset Class." The difference between equipment (asset) and an asset class can be explained as follows: Let's assume you purchase a digital panoramic X-ray machine for $40,000 and also computer-aided design/computer-aided manufacturing equipment in the amount of $160,000 for a total of $200,000. This $200,000 is considered a "asset class," whereas the indidivual assets (Digital PAN and CAD/CAM) are considered an individual asset.

Bonus Depreciation is "automatic" for tax purposes. So if you chose not to use bonus, you must elect out of bonus prior to filing your 2018 income tax return. Section 179 is an election each year, so you can decide prior to filing your tax return whether you want to elect out of bonus and use Section 179 in place of that.

With Bonus Depreciation, you can create a tax loss, but with Section 179, you can only bring the taxable income down to $0.

ADA News: What are the new rules for auto depreciation in 2018?

Mr. Schiff: Congress has changed the rules for depreciation for a luxury automobile for 2018 and beyond. The chart below, shows you a comparison of luxury auto depreciation for 2017 vs. 2018. Keep in mind, in order to obtain the tax benefit of using this luxury auto depreciation, your business automobile must be used at least 50 percent of the time for business:


2017
2018
Year 1
$11,160
$18,000 
Year 2
$5,100
 
$16,000
Year 3
$3,050  $9,600
Year 4
& beyond
$1,875  $5,760
As you can readily see, it may make sense to purchase your luxury auto in the future as opposed to leasing it.

Other concerns

   1)    In order to use Section 179 or Bonus Depreciation, the equipment must be placed and installed by Dec. 31, 2018 and be in service.
   2)    If you pay for the equipment in advance and it was not installed by Dec. 31, 2018, Section 179 and Bonus will not apply during 2018.
   3)    Be careful with expensing equipment when you acquire equipment with long-term debt as opposed to paying for the equipment with cash. To ignore this concept, you could create phantom income for you in the future.
   4)    Part of the Internal Revnue Service audit procedures within this area, is to review freight bills and bills of ladding, and to confirm when the equipment was delivered and installed. The IRS will also review dates of occupancy and related occupancy permits, when you are starting a practice in a given year where you take substanial depreciation in that given year. Be cautious here.
   5)    Auto Depreciation — be sure you are maintinaing a daily automobile log to track your business use percentage. You can track it manually or use new app such as MileIQ, Mileage Tracker and Auto Mileage Tracker.

ADA News: Any other items of note?

Mr. Schiff: In conclusion, if you have additional questions surrounding Section 179 Depreciation, Bonus Depreciation or the luxury auto depreciation rules for 2018, reach out to your CPA or if you are looking for a dental CPA, please visit www.adcpa.org for a dental CPA closest to you and your practice.  

The information in this piece is not intended to be, nor should it be construed as, tax, accounting or legal advice. Readers are urged to consult a qualified professional when seeking such advice. The ADA makes no endorsement of the above advice, nor of any website or organization mentioned in the above piece.