Yes, it’s true that you can save one third – 33% – on capital equipment investments using Section 179! Dentists are besieged with marketing communications to encourage purchases by the end of the year, but what extent of the promised savings are hype versus reality?
Here are the quick basics: Section 179 of the IRS tax code is a section of law designed to encourage business owners to invest in equipment or technology. Section 179 allows businesses – including dental practices – to deduct the full purchase price of qualifying equipment purchased or financed during the tax year, up to $500,000, from gross income. Section 179 gives you the choice – apply full depreciation for the equipment purchase in the first year, or spread out over 5 years. If your practice has purchased, financed or leased less than $2 million in new or used equipment for their business during the previous tax year, then you should qualify for Section 179.
Sounds easy: just purchase equipment and hand off to your dental accountant, right? Well, that’s only part of the information you need to know. Before you decide you can’t afford that new technology here are a few other things to consider.
Assess the Investment Potential
Every purchase should start with an honest assessment. Why do you want this technology? Will this affect the way you treat your patients? Will your patients benefit? Will it add a new revenue stream? Will it pay for itself?
Answering these questions helps to cut though marketing hype and determine if a certain technology or equipment brings an actual benefit to your practice. Regardless of the equipment cost or promised savings, understanding the value the technology brings to your practice, patients, and bottom-line will help you prioritize investments.
Section 179 = Profit?
Section 179 applies to outright purchases as well as leased and financed equipment. Leasing or financing equipment lets you spread out your payments over time. Section 179 lets you choose to deduct the full cost of the equipment in 2017. As explained by Section179.org, the amount you save in taxes can actually exceed the payments, making this a powerful deduction for your bottom line.
Yes, in many cases the deduction will actually be a profit! The amount you deduct will almost always exceed your cash outlay for the year when you combine a properly structured Equipment Lease or Equipment Finance Agreement with a full Section 179 deduction.
Your bottom line benefits, plus you get the new equipment you’re adding to your practice.
Time Actually Matters
When the marketing flyers advise you not to wait – they’re right. Equipment must be purchased AND put into service before December 31, 2017 to qualify. If the equipment requires training, you’ll need to schedule training for you – or your staff – to fully meet the requirements of Section 179. Other dentists are also looking at the same time frame, so yes, acting quickly can help ensure your spot in preferred training sessions and avoid spending New Year’s Eve learning a new office tool.
In adding technology, be aware of hidden costs. Is there an additional cost for training, or is implementation assistance included? If training is included in costs, it can generally be part of the overall financing package. If training is a different purchase and not included in the financing package, it generally does not qualify for Section 179. Not only do you pay separately for training, you lose the opportunity for a larger deduction. Another hidden cost comes to light when the new equipment requires a modification to your office. Putting in new electrical or running additional water lines to power your purchase can be unexpected costs.
We tend to think of hard costs – dollars and cents spent – without allocating for soft costs or opportunity cost. Soft costs include stress and time. Dealing with overly complicated equipment that is frustrating to operate takes a toll on you and your staff. Often technology claims to improve the bottom line by improving productivity; this really means you’re working harder not smarter.
Opportunity cost can be ultimately viewed as lost revenue. If you wait to implement a technology that helps you offer a new service, attract new patients, or increase patient acceptance, you lose the revenue you could have captured if you acted sooner.
Time Value of Money, Interest Rates, and Section 179
The idea of “time value of money” is straightforward but not simple. The concept is that a dollar is generally worth more tomorrow than today because you can make money if you invest that dollar. So, if the interest rate is 10%, one dollar invested today would be worth $1.65 in 5 years. However, the average interest rate on a money market account in 2017 is less than one percent; .8% as reported by the FDIC. This means one dollar invested traditionally today would only be worth $1.04 in 5 years. That’s not a huge profit.
The Federal Reserve has kept interest rates low for precisely this reason – it is more attractive to invest that dollar in technology to grow your business than it is to put that dollar in the bank. The key here is making sure the technology you spend that dollar on will provide a return…that’s why your accountant talks about Return On Investment (ROI).
Section 179 is a Use-It-or-Lose-It write-off that ends December 31st. Will the technology you want to purchase today with your one dollar generate more than five cents in profit over the next five years? If so, your ROI is higher when you spend that dollar on technology than when you put the dollar in the bank.
Is the Technology an Investment?
Many capital equipment items qualify for Section 179, from computers to CAD/CAM to lasers. Not all capital equipment items that qualify for Section 179 are actually investments. Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit. If the technology brings a new revenue stream – like adding a new treatment procedure to your office – then it is an investment.
Here is how Section 179 works when purchasing a particular laser technology that is an investment. The PerioLase Periodontal Package® includes equipment and training to perform the LANAP® protocol. The LANAP protocol is the only laser treatment awarded FDA clearance for True Periodontal Regeneration. By offering the LANAP protocol to your patient population suffering from periodontal disease, you add a new revenue stream to your practice, additional practice profitability, and increase patient acceptance.
In this scenario, you make $10.08 per dollar invested –instead of 4 cents per dollar invested!
When you see the “Section 179 Savings Specials” through the end of the year, take a different look at how Section 179 can help offset the cost of true investment in technology to benefit your practice, and be sure to consult a professional tax advisor for guidance on other advantageous provisions of Section 179 that may apply to your particular situation or practice location.
A version of this blog appeared on Dental Economics’ website.