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New Tax Legislation Could Save Dentists Thousands in 2008 Tom Wheelwright, CEO and founder of ProVision, PLC

New Tax Legislation Could Save Dentists Thousands in 2008
by Tom Wheelwright,
CEO and founder of ProVision, PLC

Have you thought about upgrading your equipment to the newest industry standards but were afraid of the cost? Or perhaps you want to improve your office to make it more comfortable for your patients? Do you need to upgrade your reception area to make it more efficient for your administrative staff or look nicer for your patients?

If you have been thinking about any of these improvements for your practice, consider that if you do it in 2008, the government will help pay for them. That’s right, Uncle Sam is ready to pay for a significant part of your cost of improvements, but only if you make your purchases and do your improvements in 2008.

In February 2008, President Bush signed into effect the Economic Stimulus Law of 2008. Most people know of this as the bill that gave millions of Americans a tax rebate check of $600 to $1,200. You might not have been eligible for this benefit because your income was too high, but other parts of this legislation could be worth far more to a dentist than a simple rebate check.

There are two parts of this legislation that could be particularly lucrative to you in 2008. First, there is the change to the Section 179 rules. Most of you know that if you buy new equipment you can then elect to deduct the full cost of this equipment up to certain limits. The two most important of these limits are the limitation on how much equipment you can purchase and deduct, and the limit on how much equipment you can purchase and still get any deduction. Let me briefly explain these two limits.

You might already know that normally, you can purchase up to $125,000 of equipment and deduct it in the year you place it in service (i.e., begin using it). This is the "purchase and deduct" limit. You may not realize that there is another limit. Normally, if you purchase more than $400,000 of equipment, you cannot take any Section 179 deduction. The purpose of this limit is to only allow small companies to take advantage of the 179 deduction.
Limit Comparison
  Purchase & Deduct Limit Section 179 —
Purchased Property Limit
2007 $125,000 $400,000
2008 $250,000 $800,000
2009 $125,000 $400,000
Both of these limits were increased substantially for equipment purchased and placed into service in 2008. The purchase and deduct limit was increased from $125,000 to $250,000. This deduction is not limited to equipment for 2008. It also applies to computer software and to certain leasehold improvements. The second limit, the purchase and still get any deduction, doubles for 2008 from $400,000 to $800,000 to allow more companies to take advantage of the Section 179 deduction.

What does this mean to you? If you are setting up a new office or multiple offices, you may have been disallowed any Section 179 deduction if you purchased more than $400,000 of equipment. With this limit doubled, most dentists will be able to deduct all of the equipment they buy in 2008 up to the increased $250,000 limit.

In addition to the changes to the Section 179 deduction, there is more good news for those of you expanding or renovating your offices. As you might know, Section 179 only applies to tangible personal property (i.e., equipment and furnishings). So what about all of those improvements to the office itself? Any benefit there? Absolutely! The 2008 Tax Act allows a bonus deduction for depreciation on certain property equal to 50 percent of the cost. And you still get to depreciate the other 50 percent of the cost of the property over the normal depreciation period. Here is an example:
Suppose you decide to renovate your office in 2008. You buy new equipment for $150,000, new furniture for $30,000 and make leasehold improvements to the office of $40,000. If you get this all done in 2008, your current tax deduction will be in excess of $200,000. If you wait until 2009, you will only get a deduction in 2009 of about $138,000. The difference of $62,000 would have to be depreciated over future years.
Example of Office Renovation Tax Deduction Differences
  2008 2009
Equipment $150,000 $150,000
Furniture $30,000 $30,000
Leasehold Improvements $40,000 $40,000
Tax Deduction >$200,000 <$138,000
One more benefit from this new law should not be overlooked, and that’s the additional depreciation you can take on business vehicles placed in service in 2008. Because of the "luxury auto" limitations, depreciation deductions for automobiles are severely limited. But in 2008, the limits are increased by $3,600 to more than $11,000 for the first year. Not the same impact as the increases in Section 179 or bonus depreciation, but still a nice additional benefit for 2008.

Now for the really important part of this story. What should you do? Should you spend the money? Yes, but only if it makes sense for your business! At ProVision, we never recommend spending money just for a tax benefit. After all, the maximum tax rate is on 35 percent and even with a state rate of as much as 11 percent you end up with a total of 46 percent. So, you are still paying 54 percent of the cost of the equipment yourself. Quite a discount, but the equipment or improvements certainly are not free.

On the other hand, if you are planning to make improvements to your office and/or equipment in the next year or two, it might make sense to do it in 2008 so the government can underwrite a substantial portion (35-50 percent) of the cost.

We strongly recommend you meet with your tax advisor before undertaking any tax planning. We especially recommend to our dentist clients that they work with their tax advisor to formulate a comprehensive, long-term tax strategy.

Remember that financial freedom is closer than you think if you have good tax and wealth strategies in place.
Author's Bio
Tom Wheelwright is the CEO and founder of ProVision, PLC, a full-service CPA firm in Phoenix, Arizona. Wheelwright specializes in tax and wealth strategies for dentists and other health care professionals. For more about tax strategies, please visit www.provisionwealth.com or call 866-467-5809.
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