So, I’m sure you know that piece of equipment you have in the shop that you just can’t wait to upgrade. Don’t get me wrong – it’s done well so far, but at a point, that 20-some-year-old piece of equipment just don’t cut it any more. Whether it’s an edger that’s on it’s last legs, or an exam chair with a few pieces of duct tape on it, there’s usually something that could use a replacement.
Of course, it’s not always that easy. “It still works fine!” says the manager that doesn’t actually use it on a daily basis. Or, “I can’t afford to replace it this year,” is another oft-used reason. Thanks to the federal government, however, it’s easier than ever to make equipment purchases. What if you could get the new edger (or exam equipment, dispensary furniture, or whatever else) with a 35% discount, courtesy of the IRS? That can certainly make it more affordable, and it’s very easy to do, thanks to the rules in place this year for depreciation.
The “Section 179 Deduction” is a wonderful thing for anyone that has a small to medium business and buys equipment (which includes office furniture) for their operation. What this does, essentially, is allow you to deduct the full value of the piece of equipment immediately, as opposed to depreciating it over the course of its lifespan.
What does that mean? Well, it means that you can improve the bottom line by reducing how much you owe in taxes in a given year.
Some of the things that qualify would be:
- Exam Equipment (Like the ADAPT )
- Display Boards
- Dispensary Furniture
- Some Software
Basically, a very large number of things that you are likely to buy are going to qualify for this, so why would you not use it? It’s not every day that the government gives out free money, so I think when they do, taking it is probably a good idea.
Let’s try a few examples:
So, we buy some exam equipment for the practice, and it ends up costing a completely arbitrary amount of $100,000. Since we’re allowed to depreciate this whole amount, we effectively reduce our reported profits for the year by $100,000. If we assume a 35% tax bracket, that means we just saved $35,000, since we were able to take the full expense at once. Our equipment ends up effectively costing $65,000 instead of the original $100,000. I don’t know about you, but a 35% discount is something that I don’t mind one bit.
For most small shops that don’t need large amounts of expensive equipment, this still applies to smaller equipment purchases as well. Say, for example, you noticed that a new, ergonomic, patient-approved head and chin rest was available. That’s also something that would qualify, effectively giving you a discount courtesy of the government.
There are special rules once you get above $500,000, up to $2 million. This includes things like bonus depreciation, but that’s slightly separate from the Section 179 deduction, and given that I’m not a tax professional, I’m not going to address that part. I’m assuming that if you’re spending that much on equipment alone in one year, then you have a pretty good accountant. If you spend that much and your accountant hasn’t mentioned this, then, you probably need to have a conversation with them.
One of the most important parts of this, especially for smaller businesses, is that you don’t have to buy the equipment outright. You can lease or finance the equipment and still have it qualify. So, not only do you have the option of not paying all up front, but you are still able to get the depreciation for it. That means you can actually profit off of the deduction in the first year.
Since, if you lease the equipment for, let’s say, twelve months starting in November, then you only have two months of payments made this year. You still get to deduct the full amount on your 2016 taxes, even though you have only made two of the payments for it in that tax year. This is a great tool to use if you want to be able to leverage the tax deduction without the full expense of equipment all at once.
The other important part is that you use it or lose it for this tax year. That means if you want to do it, the equipment has to be put into service by December 31st. You can’t just place the order then, you need to think ahead now about what you might want by the end of the year, otherwise it will likely be too late if you wait until mid-December to start placing orders.
This specific tax incentive has had a tendency to fluctuate, with respect to Section 179 itself as well as the ‘bonus depreciation’ aspect. Some years was more, some was less, some it wasn’t even known if it was going to be passed until December of that year. The current version seems to be stable for this year and next year, however, so it’s a good time to use it while you can.
*Note: We are not tax professionals, please direct any specific questions to a qualified professional that can discuss the specific needs of your business.
— Del Spooner