What to know about section 179 deduction when filing your taxes
Practice owners may deduct equipment purchased, used during 2024
As 2024 comes to a close, practice owners may be wondering how best to maximize their savings when filing their taxes.
IRS Code section 179 allows businesses — like dental practices — to take an immediate deduction for purchases of depreciable assets made during the year, therefore lowering their current-year tax liability.
The ADA News spoke below with Allen M. Schiff, a certified public accountant, president of the Academy of Dental CPAs and managing member of Schiff Dental CPAs, to see what dentists need to know about taking a section 179 deduction.
ADA News: Can you explain more about what section 179 allows business owners to do?
Mr. Schiff: Section 179 allows business owners to deduct the purchase price of equipment and/or software put into service during the year. In order to qualify for this tax deduction, the equipment must be placed into service on or before Dec. 31. The equipment does not have to be paid for in order to qualify for this deduction. As long as the dentist has proof of purchase through a valid invoice, along with proper financing papers, the section 179 deduction will be allowed in 2024.
ADA News: Who is eligible to take the section 179 deduction?
Mr. Schiff: Your dental practice is eligible for a deduction as long as your practice has enough income to absorb such a deduction. For example, if your practice has a net income of $100,000, you can take a deduction up to $100,000. According to the IRS Code, you cannot create a loss when taking a section 179 deduction. In the example above, the section 179 limit would be $100,000, and by taking that deduction, you would bring your net income to $0.
ADA News: What dental purchases are eligible for the deduction? What are the limits?
Mr. Schiff: The eligible purchases within a dental practice would include machinery and equipment, furniture and fixtures, qualified leasehold improvements, and computers and computer software. There are various limitations this year in order for the dental practice to qualify for the deduction. In 2024, $1.22 million of the qualifying assets can be expensed. This amount phases out dollar for dollar when the 2024 asset purchases exceed $3.05 million.
ADA News: What are the pros and cons of taking this deduction?
Mr. Schiff: As you can readily see, there is an amazing tax deduction that can be obtained if your dental practice purchases substantial qualifying assets in 2024. However, what many practice owners do not take into consideration is the cash flow associated with making this major decision within your dental practice. For example, let’s assume you purchased $100,000 of qualifying assets during 2024. Assuming you have $100,000 in net income within your practice before this deduction, you could take the deduction. No doubt you receive a large tax deduction, but you also should be considering the impact on your cash flow if you were to make this decision. For example, the entire deduction would occur in Year 1, but in years 2 through 5, when you are paying down the bank loan for the $100,000 equipment acquisition with cash, you do not receive a tax deduction for doing so. This creates “phantom income” within your dental practice. In other words, you will have taxable income within your practice during years 2 through 5 by electing the section 179 deduction in Year 1, so you have to be prepared to pay the taxes generated by this election for years 2 through 5. Please be sure to discuss this concept with your dental CPA.
ADA News: Is there anything about section 179 that is different this year that dentists need to know?
Mr. Schiff: The big change for this year is the equipment purchase limits increase to $1.22 million from $1.16 million in 2023. If I had to guess for next year, Congress will increase the 2025 section 179 limits on qualifying purchases based on a 2024 cost of living index. For example, if the Consumer Price Index increased to let’s say 2.4%, the 2025 qualifying purchasing limits may increase to $1.25 million or beyond.
The information in this piece is not intended to be, nor should it be construed as, tax, accounting or legal advice. Readers are urged to consult a qualified professional when seeking such advice. The ADA makes no endorsement of the above advice, nor of any website or organization mentioned in the above piece.
