Enhancing 2011 Deductions for Capital Expenditures
Every dental practice requires an investment in equipment to provide the highest quality of patient care. How often equipment is replaced and/or upgraded is, of course, the practice owner’s decision—and it can be complicated.
The decision to invest in equipment can be analyzed through a series of seven questions as outlined below.
1. Why buy this piece of equipment? This question can only be answered by the dentist making the purchase, and many factors must be considered. How will the technology affect the quality of care? Will it improve practice efficiency? Is the current equipment outdated or in need of constant repair? Can its replacement significantly upgrade the practice’s level of service?
While it is the doctor who determines why this equipment should be purchased, assistance from advisors may be required to answer the following six questions.
2. What is the cost of the equipment? The practice’s equipment representative can answer this question and provide cost information. Are trade show discounts available? What about website discounts? What is the best price available? Price quotes should be obtained from competing companies, if possible.
3. Should the purchase be financed? This should be addressed only after obtaining the best purchase price. Does the company provide financing? If so, how does it compare to traditional lenders? Is zero-interest financing available; if not, what is the lowest rate available? Are there prepayment penalties?
4. How long before the investment pays for itself? A return on investment (ROI) is vital because it contributes to the financial stability of the practice. Dental practices operate with significant overhead. Therefore, each new technology purchase should be able to provide a timely ROI.
Table 1 can be used to determine a dental practice’s ROI. It provides an example of a calculation in which a product purchase costs $74,000. Factoring in interest costs and assumed annual growth of the practice due to the purchase, the simple ROI is 2.8 years.
Each practice should decide what is acceptable for a ROI. In the end, knowing precisely how long the ROI will take is smarter than guessing and potentially missing the mark.
5. What are the tax benefits of the purchase? 6. What are the cash flow benefits of the purchase? 7. Should the purchase be made now, or would it be better to wait? To properly address questions 5 through 7, a review of Section 179 Deduction for Depreciation in the US tax code is required. Since 2002, the IRS has allowed businesses to deduct from their income additional depreciation during the year of the purchase. The historic deduction amounts that have been allowed are as follows: 2002, $24,000; 2003, $100,000; 2004, $102,000; 2005, $105,000; 2006, $108,000; 2007, $125,000; 2008, $250,000; 2009, $250,000.
The Small Business Jobs Act of 2010 increased the allowance to $500,000 for 2010 and 2011. The allowance is currently slated to revert back to $125,000 for 2012. Eligible purchases include computers, office equipment, furniture, and dental equipment used in the dental practice. Improvements to real estate of up to $250,000 also now qualify in 2011.
Clearly, the tax advantages to investing in capital expenditures before the end of 2011 are significant. Of course, dentists must weigh all the advantages and disadvantages before making a purchase.
Using the example of the $74,000 purchase described in Table 1, Table 2 outlines tax benefits and cash flow. From this analysis, it can be concluded that the purchase of this equipment will have a net cash flow benefit through two-thirds of Year 2 (or through Month 21 of the payment schedule) and that the net cash price of the equipment will be only $55,120.
Moreover, as shown in Table 3, this purchase can be further analyzed by including the additional average annual revenue of $30,000 that the equipment will generate. This reveals even better results. To have a net cash in on revenue of $42,380 after 5 years, this $74,000 purchase is a sound ROI.
For dentists who have been waiting to purchase new dental or office equipment, update old equipment, improve the appeal of their front office, or update their computer equipment, 2011 is the time to do it—especially if the acquisition will generate increased production. In plain terms, the tax savings can be significant and the cash flow can be positive from the day of purchase.
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Dental practitioners should check with their accountant, tax advisor, and/or financial advisor for specific guidelines applicable to them. The information contained herein: should not be used in any actual transaction without the advice and guidance of a professional tax advisor who is familiar with all the relevant facts; is general in nature and not intended as legal, tax, or investment advice; may not be applicable to or suitable for the practice’s specific circumstances or needs and may require consideration of other matters. Levin Group assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein.
About the Author
Roger P. Levin, DDS
Founder and CEO
Owings Mills, Maryland