Maximizing Tax Returns: Equipment and Building Depreciation Options for Dentists

Introduction

As a dentist, you know that top quality equipment is the key to providing excellent patient care. However, purchasing new, innovative, and cutting-edge dental technology and equipment can be expensive. Fortunately, the IRS tax code provides options for dentists to recoup some of these costs through equipment depreciation. In this article, we’ll explain the various equipment depreciation options available to dentists, and how to get the most from your investments.

Understanding Depreciation

The cost of dental equipment, regardless of whether it’s financed or is a cash purchase, can be deducted as a depreciation expense. Depreciation is the process of spreading the cost of an asset over its useful life (e.g. 10 years). However IRS regulations offer different options. You may be able to deduct the entire equipment cost in the year of purchase, or allocate deductions over the useful life of the asset. Other options include straight-line or front loaded depreciation methods, all of which allow flexibility in tax planning.

When calculating depreciation, common useful lives are 3 years for software, 5 years for equipment, 7 years for furniture, 15 years for leasehold and land improvements, and 39 years for commercial buildings.

The cost of your equipment is included in your financial statements, and is listed on the balance sheet. Dental equipment depreciation is shown in two places:

1. The annual Depreciation Expense is shown on the Profit & Loss statement (also known as the Income Statement).
2. Each year, the annual Depreciation Expense is added to the Accumulated Depreciation account on the Balance Sheet. You’ll be able to see the original asset cost (a positive number) offset by the Accumulated Depreciation (a negative number).

Tax Elections

During each tax year, you can elect or choose how to depreciate newly acquired equipment. Depreciation begins in the year the equipment is placed in service, which may differ from the invoice date. Once a depreciation election is made, you cannot switch to another method in the following years. However, in some cases you may be able to go back and amend a previous tax return to a different method. Form 4562 is the form that shows depreciation for new acquisitions.

Straight-Line Depreciation

Straight-line depreciation is the simplest depreciation method. It involves evenly spreading the cost of your equipment over its useful life, starting with the month of acquisition. This results in an even annual depreciation expense. For example, if a piece of dental equipment costs $10,000 and is expected to last 10 years, the depreciation expense would be $1,000 per year.

Accelerated Depreciation

Accelerated depreciation methods allow you to deduct a larger portion of your dental equipment cost in the early years of its use. This provides a more significant tax benefit to your business upfront. The IRS provides tables outlining how accelerated depreciation can be applied. The quarter of the year that the equipment is placed in service will affect the first year deduction.

Section 179 Deduction

The Section 179 deduction allows you to deduct up to the full cost of qualifying equipment purchases in the first year of purchase. However, your business use of the asset must exceed 50% to qualify. You can elect to use Section 179 for a portion of the cost and depreciate the balance with another method, which provides greater tax planning flexibility.

Bonus Depreciation

As a dentist, bonus depreciation allows you to deduct a percentage of the equipment’s cost in the year it is placed in service – in addition to any regular depreciation deductions. The Tax Cuts and Jobs Act of 2017 allowed for 100% bonus depreciation on qualified property. An annual 20% depreciation phase out began in 2023 with 80% allowed, in 2024 it will be 60%, and it will continue to reduce in future years.

Cost Segregation

Building acquisitions and build-outs provide an opportunity to identify building components with shorter depreciable lives, which can accelerate tax deductions. For example, carpeting, window treatments, cabinetry, operatory utilities, landscaping, parking lots, etc. can be segregated from the building structure and assigned shorter depreciable lives. This can be done on currently owned buildings, as well as new acquisitions and new constructions.

Choosing the Right Strategy

Implementing the right equipment depreciation strategy may seem complex and daunting, especially as it impacts your business profitability and tax position. Because of this, it’s important to consider your individual tax situation, cash flow needs, and long-term business goals when selecting a strategy.

While an established and profitable dental practice may want immediate tax deductions to offset large revenues, a growing dental practice may want to save deductions for later years. Consulting with a dental CPA can help you evaluate your options and develop a strategic equipment depreciation plan that aligns with your goals. They can also help you minimize your tax liability and identify any additional business deductions.

Conclusion

Now that you understand the various equipment depreciation options available to dentists, you can implement the strategy that’s best for you. Taking advantage of these depreciation methods can free up valuable resources to reinvest into your dental practice, so you can enhance patient care and drive business growth.

Do you have questions about equipment depreciation? Want to improve your dental practice’s financial position? If so, book a free consultation with our team of expert dental CPAs here at Drilldown Solution.

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