Section 179
Informing dentists about tax benefits can make their big purchases easier
The economic downturn is taking way too long to right itself. As such, your customers may be holding back on large purchases. Eventually, though, equipment wears down or breaks, and when that happens, distributor reps should be available to help dentists take the right steps to replace it, says Fred Freedman, director of marketing, Dental Trade Alliance (DTA), Arlington, Va.
One way they can help is by informing their customers about Section 179, which enables a business to receive the tax benefit of a capital equipment purchase quickly. Implemented in 1981, the tax code allows a business to recover all or part of the cost of certain qualifying property - including equipment - up to a limit, by deducting it in the year the equipment is placed into service, instead of recovering the cost by taking depreciation deductions.
According to a December 2008 DTA survey, however, 32 percent of responding dentists said they did not completely understand Section 179. The survey results were based on a sample of 534 dentists. "Female dentists (39 percent) and those working in group practices (38 percent) were statistically less likely to understand it," says Freedman. "We are concerned that, as an industry, we have not done a comprehensive job of educating our dental customers about the important tax benefits that accrue from Section 179.
"The best distributor reps have moved beyond being an order taker," he continues. "They act as consultants to the dentist and the dental practice. In this role, reps should spend time with the dentist and the senior team [at the practice], advising about existing tax incentives to upgrade the operatory, especially if a particular tax incentive or depreciation is set to expire at the end of the calendar year. In the best scenario, this may encourage the dentist to make large equipment purchases ahead of the normal cycle of updating office equipment."
Information on Section 179 is readily available on the Internet, notes Freedman, who recommends that reps print out material for their customers or refer them to Web links. Additionally, reps should advise their dental customers to consult with their accountant or financial advisor to be certain they are taking full advantage of tax or depreciation incentives and that they are following the right steps, he adds.
The Section 179 deduction
If property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year. But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased. And tax-law changes have made this option much more appealing by dramatically increasing the amount that can be written off immediately.
The 2009 Section 179 deduction limitation for taxes is $250,000. The deduction is reduced after 2009. Property that may be written off in the tax year of purchase, rather than depreciated over the asset’s useful life, includes:
- Machinery and equipment
- Furniture and fixtures
- Most storage facilities
- Single-purpose agricultural or horticultural structures.
How and when to use the deduction
The Section 179 election is made on an item by-item basis for eligible property. You don’t have to use it on all eligible property bought in that year. The election must be made in the tax year the property is first placed in service. The maximum benefit is reduced as the cost of qualifying assets you place in service in any one year exceeds $800,000. This limit is reduced after 2009 also. The deduction can not exceed taxable income in any given year.
The excess can be carried forward. The Section 179 deduction isn’t automatic.
Taxpayers who want to take the deduction must elect to do so. You make the election by taking your deduction on Form 4562. When you file this form, attach it to either of the following:
- Your original tax return filed for the tax year the property was placed in service, regardless of whether you file it timely.
- An amended return filed by the due date, including extensions, for your return for the tax year the property was placed in service. Make sure that you make the election when you file your original income tax return for that year. You can’t later amend your return to elect Section 179. The only exception is if you amend your return before the actual due date, including extensions, of your original return.
For tax years beginning in 2003 through 2010, the election can be claimed on an amended return filed at any time that the statute of limitations is open - generally three years after the initial due date.
Conclusion
The tax tip explains the process for using Section 179 to fully expense certain business expenses immediately instead of depreciating them across a period of several years. You should also be aware of less obvious advantages of the Section 179 deduction:
- Lowers adjusted gross income, which could help you qualify for various deductions that are limited by AGI.
- Lowers earned income, which can increase your earned income credit.
- Is allowed in full even if the eligible property is placed in service on the last day of the year.
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