President Obama signed the American Recovery and Reinvestment Act (ARRA) into law on February 17, 2009. The new law includes significant incentives to encourage equipment purchasing this year. You may be asking yourself, is there any benefit to me? The short answer is “perhaps”. With some quick planning and implementation, you could realize a sizeable benefit.
The Act creates an opportunity for dental practice owners to greatly accelerate cost recovery of qualifying equipment put into service in calendar year 2009. By taking advantage of the provisions, dentists can reduce taxes considerably.
The ARRA extends for one year the small business expensing levels in Section 179, which are very generous. In 2009, a dental practice can expense up to $250,000 as long as its qualified equipment purchases do not exceed $800,000, the amount that can be expensed decreases by one dollar, so that a practice that makes $1,050,000 in total purchases will not be able to expense anything (but could still claim the depreciation bonus).
The ARRA also extended for one year (i.e., through the end of 2009) the 50 percent bonus depreciation first created in February 2008. Dental practices that buy equipment in 2009 will be able to depreciate an additional 50 percent of the costs of assets placed in service this year. Only new equipment is eligible, but “new” has a liberal interpretation.
Key Points and Comments
Section 179 Expensing Summary
Bonus Depreciation Summary
How It Can Work
The ABC dental practice purchases and places in service equipment (five-year property) and office furniture in its calendar 2009 tax year having a cost of $800,000, which will be subject to the half-year convention. ABC will elect to expense $250,000 under Sec. 179, leaving the machinery with a remaining depreciable basis of $550,000. Applying the bonus depreciation provided by the Act, ANC is entitled to a further deductionin 2009 of $275,000 (50% of $550,000), leaving the machinery with a remaining depreciable basis of $275,000. Standard first-year depreciation for five-year property under the half-year convention is 20%, providing ABC with further depreciation on the machinery of $55,000. Accordingly, dental practice ABC is entitled to a total expense and depreciation deduction of $580,000 in 2009 on its $800,000 machinery. The remaining $220,000 cost of the property is recovered after 2009 under otherwise applicable rules for computing depreciation.
In talking with dentists, the awareness level of the opportunity provided by the American Recovery and Reinvestment Act seem to be rather low. The Act provides tax breaks for dental practice owners to create jobs by making it attractive to invest in their practices. However, lower taxes should not be what drives the decision making process. First and foremost, the capital improvements needs to make sense from a business and return-on-investment standpoint.
There is not much time to complete the project(s) in 2009 and to benefit from the tax breaks afforded by the ARRA. Therefore, dentists should consult with their tax advisors as soon as possible to take full advantage of the provisions the Act provides.
* Rick Epple, CFP is a member of the Northern Dental Alliance. He is an NAPFA-Registered Financial Advisor, Epple Financial Advisors, LLC, Wayzata, Minnesota. E-mail is Rick@EppleFinancial.com