Major Purchases and Tax Changes for the Dental Office
Major Purchases and Tax Changes for the Dental Office
Editor's Note:
Tax-law changes brought about by the 2010 Tax Relief Act, Section 179, and other new tax laws are important to dental practices. Margaret Scarlett, DMD, of Medscape spoke with an expert dental certified public accountant (CPA), Rick Willeford, MBA, whose accounting practice has served hundreds of dental practices for 35 years. Mr. Willeford is also a financial planner and financial specialist. He is founding president of the Academy of Dental CPAs, a national group of CPA firms with dental expertise that works with more than 7000 dentists.
Medscape: Last year some tax-law changes were made that could affect dental practices for both 2010 and 2011 . Can you explain?
Rick Willeford: The 2010 Tax Relief Act is one of many new tax provisions that extended the Bush tax cuts but provided a few new benefits, such as allowing an immediate deduction for greater depreciation deductions in the first year after major purchases, rather than depreciating them over 5 years. These deductions are not for consumables, such as dental supplies or lab fees, which you would deduct the year that you pay for them because the Internal Revenue Service (IRS) assumes that you consume those immediately.
In the past, if you bought some major equipment, such as a new dental unit and/or dental chairs, a computer-aided design/computer-aided manufacturing (CAD/CAM) system, the IRS required you to deduct this purchase over a longer period of time, usually 5 or 7 years. The election to immediately deduct equipment purchases up to a certain limit is called Section 179 Election, after the related section of tax code. For 2010 and 2011, the Section 179 limit had already been increased to $500,000. In a surprise move, the 2010 Tax Relief Act allows even more benefit than Section 179. This new law says that if a new property is placed in service between September 8 and December 31, 2010 and for all of 2011, deductions are allowed for 100% of the equipment's value with no upper limit. In 2012, there is no limit, but deductions are limited to 50% of the equipment's value.
Section 179 is still available and is important because it also covers the purchase of used equipment. Initially, the limit was set to drop back to the pre-Bush limit of $25,000 in 2012 and beyond. In addition, for 2012 and beyond, Section 179 is available for depreciating new and used equipment placed in service and valued at up to $500,000. However, for 2013 and beyond, the upper limit for purchases is $125,000. An important reminder: The equipment must be "placed in service" during the year that you take the deduction.
Medscape: What qualifies as "new major equipment?" Are these capital investments, such as digital x-rays or electronic dental records?
Rick Willeford: Yes. Any kind of heavy equipment or product that would be in service for a number of years is eligible for accelerated depreciation for these special elections, so you can take an immediate deduction.
Medscape: What type of property would this include?
Rick Willeford: There are 2 categories of property: "personal property" and "real property." Personal property is really a poor choice of words because it implies nonbusiness, but that is not true, because it means furniture, automobile, equipment, and certain office improvements that cost up to $250,000. These types of personal property qualify for an immediate write-off. This does not apply to real property, which is real estate.
Medscape: In making the decision about whether to purchase something, how would return on investment be favorably affected by these new tax laws?
Rick Willeford: The new tax law allows you to accelerate or speed up enjoyment of one of the benefits of purchase, tax deductibility; however, a caution is that we encourage people to evaluate their needs and not to make purchases simply to avoid a tax bill. We've heard the story of the dentist who, every December when he is going to owe $10,000 in taxes, buys a new dental unit and now has 3 unopened dental units in his garage that he never needed. That's not a good idea.
Savvy financial planning and wealth management shouldn't just focus on cutting taxes as a primary objective but on increasing your wealth. Ask yourself questions about the benefit of the machine to the practice. For example, a CAD/CAM system that costs $125,000 is a little less than $2000 a month on a 5-year note, but it probably saves you about $100-$150 in lab fees per crown. And this does not include the tax deduction for the purchase of the machine.
It is also important to look at your expenses. Recently, I overhead a salesman ask a dentist (who was considering a purchase of a digital crown fabrication system) how much he was spending on laboratory fees. With 3 dentists in the office, they were spending $12,000 per month; his purchase would have saved $6000 a month, but the dentist said he couldn't afford to purchase this equipment! He wasn't looking at return on investment (ROI) and savings. However, if you do enough units -- say, 15-25 inlays, onlays, or crowns a month -- then it may be cost-effective.
Another example is the dentist who personally insists on doing his own design work on that CAD/CAM system and works an hour to avoid a $100 lab fee. Instead, he should delegate that task to a qualified assistant. If the doctor can generate $600 an hour doing crowns, bridges, veneers, or other procedures, it probably makes more sense to train a chairside assistant to do the laboratory design function on the machine. Each of these factors, in addition to the initial cost, should be weighed in determining the cost-effectiveness of purchasing new equipment. You must factor in the lab savings on the basis of the number of units per month, the efficiency and time savings (not only the dentist's but the patient's), and the marketing sizzle of offering 1-visit crowns.
There are many nuances to deductions in addition to the simple math to maximize the benefit. If you make gross collections of $500,000 and have only $100,000 of taxable income after business and personal tax deductions, it doesn't make any sense to have a $125,000 equipment tax deduction in a single year. You can delay that deduction to better advantage over time. For example, if you are in a much lower tax bracket, as you get closer and closer to zero profit, you drop the marginal tax bracket from 25% or 15% down to 0%. Although you save taxes, it is only 15 cents on the dollar of your investment compared with 50 cents on the dollar if you are in a higher tax bracket (which includes federal, state, and payroll taxes). If you have only $100,000 in taxable income, you would not get as much immediate benefit for a large purchase as a dentist who had $300,000 of taxable income. If the practice is incorporated, there are other issues as well, and it might be best to consult a CPA with dental expertise. A nondentist CPA may not be familiar with dental practices and equipment and doesn't appreciate the potential ROI of dental purchases that might cost $125,000.
Medscape: Are deductions an individual decision for the dentist?
Rick Willeford: Making that individual decision is vitally important. Let's assume that you do have a high income. It still often makes sense to not take the full deduction immediately. The reason is to balance the timing of the tax deduction with the timing of loan repayments. Remember that in the second to fifth year after a large purchase, dentists are still paying the note and may want to offset income with some of the depreciation in later years.
Medscape: Will better use of other members of the team maximize your investment?
Rick Willeford: Yes, especially for something like a CAD/CAM machine, where training is required. The intraoral camera is a good example of a technology that will make money for your practice. This is an item with a positive ROI. Other things can factor into building your practice more than ROI. For instance, in the CAD/CAM domain, if you produce a crown while the patient waits and the word gets out in the community that the patient only had to take 1 day off from work or make 1 visit rather than do the temporary crown and then have come back in 2 weeks for the final crown appointment, you have added value.
If you could only afford to buy 1 item, every new graduate ought to invest in an intraoral camera because this is a practice-builder and an excellent way to engage the patient in seeing what the dentist sees.
Medscape: Under the American Recovery and Reinvestment Act, there are significant tax credits for physicians who adopt electronic medical records. Are there similar tax credits for the dentist who is contemplating using electronic dental records in his or her practice?
Rick Willeford: Yes, at least theoretically. But to receive tax cuts, you must produce at least 30% of your income from Medicaid or Medicare. Most likely, this is limited to practices such as oral surgery and pediatric dentistry. You must meet the Health and Human Services "meaningful use" standards, with 15 specific functions or criteria. Organized dentistry is behind on the meaningful-use standard. Although they did a good job of fighting the "red flag rule," exempting small offices such as dental offices from proof of identity for credit or credit cards, they have not yet identified meaningful use for 2011. So, as of January 2011, no certified or certifiable dental electronic record system qualifies for the tax credit. Dentists can't get that tax credit yet without further action on meaningful-use standards for electronic dental records. However, the ADA has just announced a task force to tackle this issue.
Many dentists are already ahead of their physician colleagues because they are paperless, but their systems don't have interoperability, in which different record systems can communicate with each other. In other cases, there are separate systems for ePrescriptions that are not integrated into the dental records. The certification process that I mentioned is what will provide the standards.
Medscape:A tax change authorizes a 2% minimum payroll tax reduction. Does this apply to dentists and their employees?
Rick Willeford: We have posted this information on our blog. Every employee gets a 2% reduction, but this does not apply to the employer portion. So a maximum Social Security deduction of 7.65% for the employee for 2011 would be only 5.65%. For the self-employed dentist, the employer contribution would remain the same, but half of the tax paid by the proprietor would be reduced by 2%. This applies to the first $106,800 of income, and after that Medicare contributions of 1.45% continue. The new tax reduction applies to employee payroll from January through December of 2011.
Medscape: With all of these tax-law changes, such as Section 179, the 2010 Tax Relief Act, and this 1-year 2% payroll tax reduction, do dentists need expert guidance to address these tax-law changes?
Rick Willeford: Yes; many nuances and interactions must be addressed. For those depreciation deductions that we discussed earlier, it is important to note that you only get that deduction the year that the item is placed in service, not when it is ordered. If you rushed down to the sales representative on December 31 and authorized a sales order, that's not sufficient to take the deduction that year. The equipment must be plugged in and ready for service. This is why it is important to have a highly qualified dental CPA. More than a bookkeeper, these folks keep current with continuing education, communicate with their clients, and know the differences between a typical dental practice and a medical practice.
At least a couple of times a year you should be getting a tax projection. In June 2011, you should receive a tax projection that shows how much tax you'll owe on April 15, 2012. This gives adequate time to plan to avoid tax penalties for late payment to the IRS, as well as to plan equipment purchases.
Tax-Law Changes and Dentists
Editor's Note:
Tax-law changes brought about by the 2010 Tax Relief Act, Section 179, and other new tax laws are important to dental practices. Margaret Scarlett, DMD, of Medscape spoke with an expert dental certified public accountant (CPA), Rick Willeford, MBA, whose accounting practice has served hundreds of dental practices for 35 years. Mr. Willeford is also a financial planner and financial specialist. He is founding president of the Academy of Dental CPAs, a national group of CPA firms with dental expertise that works with more than 7000 dentists.
Medscape: Last year some tax-law changes were made that could affect dental practices for both 2010 and 2011 . Can you explain?
Rick Willeford: The 2010 Tax Relief Act is one of many new tax provisions that extended the Bush tax cuts but provided a few new benefits, such as allowing an immediate deduction for greater depreciation deductions in the first year after major purchases, rather than depreciating them over 5 years. These deductions are not for consumables, such as dental supplies or lab fees, which you would deduct the year that you pay for them because the Internal Revenue Service (IRS) assumes that you consume those immediately.
In the past, if you bought some major equipment, such as a new dental unit and/or dental chairs, a computer-aided design/computer-aided manufacturing (CAD/CAM) system, the IRS required you to deduct this purchase over a longer period of time, usually 5 or 7 years. The election to immediately deduct equipment purchases up to a certain limit is called Section 179 Election, after the related section of tax code. For 2010 and 2011, the Section 179 limit had already been increased to $500,000. In a surprise move, the 2010 Tax Relief Act allows even more benefit than Section 179. This new law says that if a new property is placed in service between September 8 and December 31, 2010 and for all of 2011, deductions are allowed for 100% of the equipment's value with no upper limit. In 2012, there is no limit, but deductions are limited to 50% of the equipment's value.
Section 179 is still available and is important because it also covers the purchase of used equipment. Initially, the limit was set to drop back to the pre-Bush limit of $25,000 in 2012 and beyond. In addition, for 2012 and beyond, Section 179 is available for depreciating new and used equipment placed in service and valued at up to $500,000. However, for 2013 and beyond, the upper limit for purchases is $125,000. An important reminder: The equipment must be "placed in service" during the year that you take the deduction.
Medscape: What qualifies as "new major equipment?" Are these capital investments, such as digital x-rays or electronic dental records?
Rick Willeford: Yes. Any kind of heavy equipment or product that would be in service for a number of years is eligible for accelerated depreciation for these special elections, so you can take an immediate deduction.
Medscape: What type of property would this include?
Rick Willeford: There are 2 categories of property: "personal property" and "real property." Personal property is really a poor choice of words because it implies nonbusiness, but that is not true, because it means furniture, automobile, equipment, and certain office improvements that cost up to $250,000. These types of personal property qualify for an immediate write-off. This does not apply to real property, which is real estate.
Medscape: In making the decision about whether to purchase something, how would return on investment be favorably affected by these new tax laws?
Rick Willeford: The new tax law allows you to accelerate or speed up enjoyment of one of the benefits of purchase, tax deductibility; however, a caution is that we encourage people to evaluate their needs and not to make purchases simply to avoid a tax bill. We've heard the story of the dentist who, every December when he is going to owe $10,000 in taxes, buys a new dental unit and now has 3 unopened dental units in his garage that he never needed. That's not a good idea.
Savvy financial planning and wealth management shouldn't just focus on cutting taxes as a primary objective but on increasing your wealth. Ask yourself questions about the benefit of the machine to the practice. For example, a CAD/CAM system that costs $125,000 is a little less than $2000 a month on a 5-year note, but it probably saves you about $100-$150 in lab fees per crown. And this does not include the tax deduction for the purchase of the machine.
It is also important to look at your expenses. Recently, I overhead a salesman ask a dentist (who was considering a purchase of a digital crown fabrication system) how much he was spending on laboratory fees. With 3 dentists in the office, they were spending $12,000 per month; his purchase would have saved $6000 a month, but the dentist said he couldn't afford to purchase this equipment! He wasn't looking at return on investment (ROI) and savings. However, if you do enough units -- say, 15-25 inlays, onlays, or crowns a month -- then it may be cost-effective.
Another example is the dentist who personally insists on doing his own design work on that CAD/CAM system and works an hour to avoid a $100 lab fee. Instead, he should delegate that task to a qualified assistant. If the doctor can generate $600 an hour doing crowns, bridges, veneers, or other procedures, it probably makes more sense to train a chairside assistant to do the laboratory design function on the machine. Each of these factors, in addition to the initial cost, should be weighed in determining the cost-effectiveness of purchasing new equipment. You must factor in the lab savings on the basis of the number of units per month, the efficiency and time savings (not only the dentist's but the patient's), and the marketing sizzle of offering 1-visit crowns.
There are many nuances to deductions in addition to the simple math to maximize the benefit. If you make gross collections of $500,000 and have only $100,000 of taxable income after business and personal tax deductions, it doesn't make any sense to have a $125,000 equipment tax deduction in a single year. You can delay that deduction to better advantage over time. For example, if you are in a much lower tax bracket, as you get closer and closer to zero profit, you drop the marginal tax bracket from 25% or 15% down to 0%. Although you save taxes, it is only 15 cents on the dollar of your investment compared with 50 cents on the dollar if you are in a higher tax bracket (which includes federal, state, and payroll taxes). If you have only $100,000 in taxable income, you would not get as much immediate benefit for a large purchase as a dentist who had $300,000 of taxable income. If the practice is incorporated, there are other issues as well, and it might be best to consult a CPA with dental expertise. A nondentist CPA may not be familiar with dental practices and equipment and doesn't appreciate the potential ROI of dental purchases that might cost $125,000.
Medscape: Are deductions an individual decision for the dentist?
Rick Willeford: Making that individual decision is vitally important. Let's assume that you do have a high income. It still often makes sense to not take the full deduction immediately. The reason is to balance the timing of the tax deduction with the timing of loan repayments. Remember that in the second to fifth year after a large purchase, dentists are still paying the note and may want to offset income with some of the depreciation in later years.
Medscape: Will better use of other members of the team maximize your investment?
Rick Willeford: Yes, especially for something like a CAD/CAM machine, where training is required. The intraoral camera is a good example of a technology that will make money for your practice. This is an item with a positive ROI. Other things can factor into building your practice more than ROI. For instance, in the CAD/CAM domain, if you produce a crown while the patient waits and the word gets out in the community that the patient only had to take 1 day off from work or make 1 visit rather than do the temporary crown and then have come back in 2 weeks for the final crown appointment, you have added value.
If you could only afford to buy 1 item, every new graduate ought to invest in an intraoral camera because this is a practice-builder and an excellent way to engage the patient in seeing what the dentist sees.
Medscape: Under the American Recovery and Reinvestment Act, there are significant tax credits for physicians who adopt electronic medical records. Are there similar tax credits for the dentist who is contemplating using electronic dental records in his or her practice?
Rick Willeford: Yes, at least theoretically. But to receive tax cuts, you must produce at least 30% of your income from Medicaid or Medicare. Most likely, this is limited to practices such as oral surgery and pediatric dentistry. You must meet the Health and Human Services "meaningful use" standards, with 15 specific functions or criteria. Organized dentistry is behind on the meaningful-use standard. Although they did a good job of fighting the "red flag rule," exempting small offices such as dental offices from proof of identity for credit or credit cards, they have not yet identified meaningful use for 2011. So, as of January 2011, no certified or certifiable dental electronic record system qualifies for the tax credit. Dentists can't get that tax credit yet without further action on meaningful-use standards for electronic dental records. However, the ADA has just announced a task force to tackle this issue.
Many dentists are already ahead of their physician colleagues because they are paperless, but their systems don't have interoperability, in which different record systems can communicate with each other. In other cases, there are separate systems for ePrescriptions that are not integrated into the dental records. The certification process that I mentioned is what will provide the standards.
Medscape:A tax change authorizes a 2% minimum payroll tax reduction. Does this apply to dentists and their employees?
Rick Willeford: We have posted this information on our blog. Every employee gets a 2% reduction, but this does not apply to the employer portion. So a maximum Social Security deduction of 7.65% for the employee for 2011 would be only 5.65%. For the self-employed dentist, the employer contribution would remain the same, but half of the tax paid by the proprietor would be reduced by 2%. This applies to the first $106,800 of income, and after that Medicare contributions of 1.45% continue. The new tax reduction applies to employee payroll from January through December of 2011.
Medscape: With all of these tax-law changes, such as Section 179, the 2010 Tax Relief Act, and this 1-year 2% payroll tax reduction, do dentists need expert guidance to address these tax-law changes?
Rick Willeford: Yes; many nuances and interactions must be addressed. For those depreciation deductions that we discussed earlier, it is important to note that you only get that deduction the year that the item is placed in service, not when it is ordered. If you rushed down to the sales representative on December 31 and authorized a sales order, that's not sufficient to take the deduction that year. The equipment must be plugged in and ready for service. This is why it is important to have a highly qualified dental CPA. More than a bookkeeper, these folks keep current with continuing education, communicate with their clients, and know the differences between a typical dental practice and a medical practice.
At least a couple of times a year you should be getting a tax projection. In June 2011, you should receive a tax projection that shows how much tax you'll owe on April 15, 2012. This gives adequate time to plan to avoid tax penalties for late payment to the IRS, as well as to plan equipment purchases.