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

• Equipment and qualified property must be purchased and place in service in 2009.  There is not much time to complete these types of projects without starting today.
• As happened in 2008, these provisions may be extended another year into 2010.  Dentists should not plan on this, but keeping an eye on this provision could help to hit the ground running next year.
• While the Recovery and Reinvestment Act makes investing in a dental practice attractive, it does not mean the road should be considered wide open. A well thought out analysis and plan of upgrading equipment and the office should be completed to insure the desired Return on Investment (ROI) is achieved.
• Only equipment and property subject to a less than 20-year depreciation schedule qualifies for the bonus depreciation.
• By increasing a dental practice’s tax deductions in 2009, the asset expense election and bonus depreciation help trim tax bills in the short term.  However, because there will be less to depreciate in the future, the practice’s tax bill in later years may be higher.
• Dentists need to work with their tax advisors proactively to determine qualifying equipment and property. This includes an analysis of taking the deductions again 2009 income versus waiting.

Section 179 Expensing Summary

• The 2009 ARRA extended for one year the increased Sec.179 expensing limit of $250,000 and phase-out cap to $800,000
• Expensing is phased out for each dollar that purchases exceed $800,000
• Companies with total purchases of $1,050,000 cannot use Sec 179
• Can be combined with depreciation bonus
• New and used equipment are eligible for expensing
• Applies to tax years that start in 2009
• Sec. 179 expensing levels will drop at end of 2009 unless extended

Bonus Depreciation Summary

• The 2009 ARRA allows additional first-year 50 percent depreciation of the purchase cost by extending for one year the bonus depreciation created by the 2008 Economic Stimulus Act.
• Bonus depreciation helps businesses that buy qualified property this year cut their 2009 taxes. Will expire at the end of 2009 unless extended.
• Applies to purchases of tangible personal property with a MACRS recovery period of 20 years or fewer.
• Equipment must be new. However, the definition appears to be liberally interpreted:
  • New qualified leaseholder improvements such as office remodeling projects to the interior may qualify.
  • Personal property converted to the business may qualify. An example of a property that might qualify would be a car.
  • Used rebuilt equipment or reconditioned costs may qualify.

• Equipment must be purchased and placed in service in 2009.
• Allowed for both regular and alternative minimum tax purposes.
• Tacpayers need not claim the depreciation bonus, but do have to elect not to.

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.

Summary

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