As of this writing, it’s mid-November. Dentists should be utilizing year-end tax planning strategies to minimize their tax exposure in 2017 and take advantage of accelerated deductions. With tax reform on Congress’s agenda this winter, existing credits, deductions, and tax rates are up in the air.
The best course of action is to plan for what we know; below are our tips to help dentists effectively plan for 2017 year-end taxes.
If you were thinking about purchasing new or used office or operatory equipment or dental practice management software, do it soon. The current Section 179 deduction limit is $500,000 (and is adjusted for inflation going forward) and qualifying purchases must be financed, leased, or purchased and put into service by December 31, 2017. There is a $2 million spending cap on qualifying purchases.
This deduction is an incentive for businesses to purchase and install energy-efficient interior lighting, upgrades to the building envelope, or heating, cooling, ventilation, or hot water systems. The building’s total energy cost should be reduced by 50 percent or more, and deductions are taken in the year the upgrades were placed into service.
Although Section 179D expired on December 31, 2016, there is hope for a retroactive extension. On May 8, 2017 Congress proposed the Clean Energy for America Act, which contained similar measures to Section 179D – most notably, an extension through December 31, 2018. Given its history of expirations and extensions, we think it’s likely this will be reinstated … but we don’t know when. Keep this tax strategy on your radar.
Bonus depreciation goes in hand with Section 179 deduction, except that the current 50 percent rate of bonus depreciation is set to expire at the end of 2017. Assets placed into service in 2018 are eligible for a 40 percent depreciation, and 30 percent in 2019 – then expire completely beginning January 1, 2020. Between Section 179 and bonus depreciation, now is probably the best time to purchase, lease, or finance new equipment for your dental office.
Qualified Leasehold Improvements
If you plan to make an improvement to your dental office’s interior building, you can take a qualified leasehold improvement deduction. The building must have been placed in service at least three years before you take the deduction, which is a straight-line deduction of 15 years – instead of the standard 39 years. The chance to claim deductions over a shorter period instead of depreciating them over 39 years is a tax savings, and keeps more money in your business.
Now is also a great time to take advantage of accelerated deductions that will make your tax dollar go further. Our top two suggestions are a cost segregation study and partial dispositions.
Do you own the building your dental office is in, and you bought, built, or remodeled that building within the last 15 years? If so, then a cost segregation study would help you identify individual interior and exterior improvement costs that you can deduct over a five, seven, or fifteen-year period – instead of a straight line 39-year depreciation. The reason this matters now is because the new tax reform proposal excludes building structures from being immediately deducted. There are exceptions and limitations, so schedule a meeting with us today if this is something you want to talk about.
Did you spend a significant amount of money on capital improvements to your building? You might be eligible for a partial disposition deduction on the components you removed. For example, if you replaced the furniture or remodeled your dental practice, a partial disposition would identify and retire what you removed, thereby allowing for an immediate deduction of any remaining depreciable value. As with a cost segregation study, you should schedule a meeting with your dental CPA soon to discuss your options.
Other Dental Practice Tax Planning Tips
As December 31 approaches, consider these strategies to maximize your expense deductions in 2017.
- Use your company credit card to make purchases
- Have purchased furniture and equipment delivered prior to December 31
- Set up fringe benefits, like vehicles, meals and entertainment, meetings and conference registrations, travel arrangements, and home office prior to December 31
- Should family members be employed? There are great tax deductions for family members who are employees.
Tax Planning Tips for 2018
As you enter the new year, there are a few things you can do to set yourself up for tax success.
- Missed expenses can be reimbursed in 2018
- Some associate wages can be employer-paid professional expenses instead
- Max out retirement plan contributions:
- 401(k) limits in 2017 are $18,000 and an additional $6,000 in catch-up contributions for individuals 50 and older
- 401(k) limits in 2018 are $18,500 and catch-up contribution limits remain the same
- Max out health insurance contributions:
- Health Savings Account contribution limits for 2017 are $3,400 for individuals without family coverage and $6,750 with family coverage
- Contribution limits for 2018 are $3,450 for individuals without family coverage, and $6,900 with family coverage
For small business year-end tax planning strategies, read the N/L CPAs blog post here.
If you have questions onhow best to prepare and organize your dental office’s taxes, please contact us. The more time you allow for planning, the more opportunities you’ll have to save on taxes as 2017 ends.