Dental office deductions extended under the ATRA

March 14, 2013
Dentists should be aware that the American Taxpayer Relief Act of 2012 (ATRA) extends expired and expiring tax breaks of significant importance to their practices.

By J. Haden Werhan, CPA/PFS

Dentists should be aware that the American Taxpayer Relief Act of 2012 (ATRA) extends expired and expiring tax breaks of significant importance to their practices.

Vince Alongi, ATRA and deductions

Section 179

Under Section 179 of the Internal Revenue Code, a dentist may elect to deduct as an expense, rather than depreciate over a period of years, up to a specified amount of the cost of new or used tangible personal property "placed into service" in the practice during the tax year. Note that how an asset is acquired, through financing or by paying cash, or when that asset is paid for, has nothing to do with when it is placed into service and eligible to be deducted. This is an important and often misunderstood point. Accordingly, rushing to sign a purchase order for new equipment by December 31 in order to get a big deduction for the year will not satisfy the "placed into service" rule. Before a deduction may be taken, equipment must be installed, working, and in use for patient care. IRS auditors are fully aware of these rules and will ask for documentation of delivery, installation, and use for patient treatment. Let's look at two examples:

Example 1 — Dr. White recently purchased a practice that has been growing nicely, and he decided it was time to incorporate a new computer system and digital radiography. Dr. White traveled to San Francisco for the ADA meeting in October 2012, selected his equipment, and, after a call to his dental CPA, signed a purchase agreement for the $80,000 investment. He was then escorted by the salesperson to the dental bank booth at the convention where he signed a loan agreement for $80,000. While he was on vacation in northern California the following week, the bank paid the vendor for the equipment, which was then delivered on November 30. Dr. White and his staff spent the month of December learning their new systems and "went live" in January 2013. Based on these facts, when does Dr. White get to deduct or begin depreciating his new assets? The answer is in 2013 when he began using the new technology on patients. Dr. White and his CPA felt that this was a good strategy since he still had a fair amount of write-off from the purchase of his practice available in 2012. Moreover, he would be able to use the write-off from his new technology purchase to his advantage later when he will be in the highest tax bracket. This strategy still made sense in spite of the fact that his technology purchase will be subject to the 2.3% Medical Devices Excise Tax under the Affordable Care Act (Obama Care). Dr. White's purchase will be written off at $16,000 per year for five years.

Example 2 —Dr. Black was planning for the sale of her practice in a couple of years. In a recent meeting with her dental CPA, Dr. Black discussed the current state of her practice. She believed it needed to be modernized if it was to be attractive to prospective buyers and that new technology would enable her to accomplish this, thereby increasing the value of her practice. While at the same ADA meeting, she made the exact same purchase as Dr. White – $80,000 for a new computer system and digital radiography. However, unlike Dr. White, Dr. Black was in need of as much write-off as possible to mitigate the tax bill resulting from her IRA to Roth IRA conversion in 2012. Also, Dr. Black intended to pay cash for her equipment with money in a CD that wouldn't mature until January. Knowing of Dr. Black's stellar reputation and excellent credit, the salesperson agreed to postpone payment for the new equipment until Dr. Black's CD matured in January, yet he delivered and installed the equipment before Thanksgiving. Dr. Black and her team took a crash course on the new technology and began using it for patient care on December 1, 2012. Dr. Black may take a full Section 179 deduction of $80,000 on the equipment in 2012 even though it wouldn't be paid for until the next year since she met the criteria of "placed into service." Thus, Dr. Black's 2012 practice income will be lower by $80,000.

Section 179 may not be used to create a taxable loss for one's dental practice; however, it may be used to bring a dentist's income to zero. Any amount that is not allowed as a deduction because of this limitation may be carried forward to succeeding tax years. Any amount not elected as a Section 179 deduction may be written off (depreciated) over the appropriate lifetime for the asset. In other words, it is not a "use it or lose it" proposition. Also, many states do not comply with the federal rules for Section 179, so dentists in such states will have higher taxable state income than taxable federal income. Thus, the election to use Section 179, and how much to use in any given year, should be carefully considered by dentists and their dental CPAs.

Prior to the American Taxpayer Relief Act of 2012, the maximum amount that could be expensed under Section 179 was $139,000 in 2012 and $25,000 in 2013. However, retroactively effective for 2012 and effective for 2013, ATRA increases the maximum Section 179 expensing amount to $500,000. Also, especially important for dentists building new offices, ATRA extends for two years the provision that up to $250,000 of qualified leasehold improvements are eligible for expensing under Section 179 or for 15-year depreciation as opposed to the normal 39 years. The definition of qualified leasehold improvements is complicated but, for dentists that lease their dental offices and make new leasehold improvements, they will be considered qualified. If, however, one owns one's space, those same leasehold improvements are not qualified and must be depreciated over 39 years. This makes a cost segregation study all that much more important for dentists who practice in real property that they own.

Bonus Depreciation

Before the passage of the American Taxpayer Relief Act of 2012, Bonus Depreciation was set to expire at the end of 2012. Bonus Depreciation allows 50% of the adjusted basis (cost) of "qualified property" to be depreciated in the year it is placed into service. The basis of the property and the depreciation allowances in the year of purchase and later years must be adjusted to reflect the additional first-year depreciation deduction. Bonus depreciation is optional and, generally, an asset qualifies if:

✔ Normal depreciation rules apply, and it has a recovery period (life) of 20 years or less; it is "off the shelf" computer software; or "qualified" leasehold improvements (not in a space owned by the dentist).

✔ It is placed in service before Jan. 1, 2013.

✔ Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property.

The American Taxpayer Relief Act of 2012 extends the 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014. It also extends the $8,000 boost in the first-year depreciation cap for light trucks and automobiles until the end of 2013.

While ATRA will increase taxes for many dentists, the cloud does have a silver lining for those able to take advantage of one or more of these "business extenders" that are available for the next couple of years.

Note from the author: The material in this article is not intended to constitute specific tax or legal advice. The information contained herein is designed solely to provide guidance to the reader, and is not intended to be a substitute for the reader seeking personalized professional advice based on specific factual situations. We strongly recommend you seek the counsel of a CPA who specializes in working with dentists.

Feel free to contact J. Haden Werhan, CPA/PFS, principal and owner of Thomas Wirig Doll, an accounting and wealth management firm that works with dentists. He can be reached at [email protected] or (877) 939-2500.