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Invest in Your Practice Now for Immediate Gains September 8, 2009

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Invest in Your Practice Now for Immediate Gains
Arthur Wiederman
Arthur S. Wiederman, CPA, CFP, is President of Wiederman & Associates in Tustin, California, a CPA firm dealing exclusively with dentists. A graduate of California State University, Long Beach, Art specializes in tax and financial planning, helping doctors meet their business and personal financial goals. He has led courses on Dental Practice Financial Management at professional organizations and colleges throughout the country. Art can be reached at or 714.259.0505.
By Arthur Wiederman
Published on 08/12/2009

Why should you invest in your practice now, when the global economy is in crisis and many individuals are hunkering down and saving?
Invest in Your Practice Now for Immediate Gains

Why should you invest in your practice now, when the global economy is in crisis and many individuals are hunkering down and saving?
Here’s why: First, the 2008 Economic Stimulus Act provides a tremendous incentive for practice owners to invest in their businesses with equipment purchases, increasing the 2009 Internal Revenue Code Section 179 tax deduction to a level you may not see again for many years. And second, investing in your practice maintains its value, which is the best security you can have for your future success.

So if your expertise and marketing have paid off and your net profits are up over last year, the first thing to think about is reinvesting those extra profits in your practice.

Invest With the Help of Section 179

Section 179 of the Internal Revenue Code has been in the law for many years. It allows small business owners to currently write off their purchase of equipment and furnishings placed in service during the year instead of depreciating that equipment. The 2008 Economic Stimulus Act has raised the 2009 limit for the deduction from $125,000 to $250,000.

Property that qualifies for the Section 179 deduction is generally tangible personal property placed in service during the taxable year (though it does not have to be paid for during the year). Land, improvements to land and structural components of a building generally do not qualify. Most all veterinary equipment, furniture, fixtures and the like will qualify.

For example, assume you purchased a new digital x-ray for $6,000. Without the Section 179 deduction you would capitalize the digital x-ray and depreciate it over five years, so in the first year the deduction would be $1,200 (20% depreciation in the first year). With the Section 179 deduction you can deduct the entire $6,000 -- REGARDLESS OF WHETHER YOU PAID FOR IT!

Well-Timed Purchases Can Maximize Deductions

Theoretically you could open a new hospital on December 27th, equip and place in service two exam rooms and a surgery suite at a cost of $105,000, finance the purchase over five or seven years with your first payment in January, 2010 and – as long as the equipment is installed and ready to use by December 31st – you get a write-off of $105,000 WITHOUT PAYING OUT A DIME THIS YEAR! The law is very specific – the equipment has to be placed in service and it does not matter whether you have paid for it yet or not.

If you’re building a new hospital, it typically takes 3-6 months to complete once you begin construction (depending on your landlord, contractor, architect, and other build-out factors). So if you are planning to move into your hospital in mid-December and you are having two exam rooms and two surgery suites equipped, you could open the new hospital the week between Christmas and New Year’s, install your new computer system ($20,000), two new exam rooms and a surgery suite ($50,000), and the hospital furniture ($20,000) – and then the first week of January install the second two exam rooms and surgery suite ($50,000), and additional veterinary equipment ($50,000).

In this scenario you would have a Section 179 deduction for 2009 of $90,000 and a Section 179 deduction for 2010 of $100,000. You would be able to write off $190,000 of equipment over two years, yet you will only have made twelve payments on your loan (first payment due January, 2010). That is a tax savings over two tax years of $76,000 if your marginal tax bracket is 40%.

Benefits of a Cost Segregation Study

If you are constructing a new hospital building or buying or leasing a shell to build out, you can benefit significantly from a cost segregation study. By segregating the costs of your project based on certain engineering specifications, you can often convert as much as 30-40% of the project cost from the “buildings” category (which has to be written off over 39 years) to the “personal property “category (which can be written off over five years and qualifies for the Section 179 deduction). If you are spending more than $200,000 on a building project (not including actual veterinary equipment and furnishings) you should seriously consider a study.

Say, for example, you spent $400,000 on the build-out of a new hospital. With a cost segregation study, you could take perhaps 30% of this cost ($120,000) and convert it from 39- year depreciation (about $3,000 per year in write-off) to a Section 179 deduction, which is potentially a complete write-off in the year the hospital is placed in service. This is a difference of $117,000 which, at a 40% marginal income tax rate, would save $46,800 in taxes. Depending on the size of your hospital project, a cost segregation study can be performed for as little as $3,000 to $5,000 – a minimal investment for such a significant potential return.

The bottom line is that if your practice profit has gone up this year, reinvesting in your business with timely planning of equipment purchases can provide immediate gains that can be critical to your success while maintaining the value of your practice over the long term.

And finally – proper tax planning for your practice is very important, so do consider working with a CPA who specializes in your field.

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