Taxes: Depreciation

Let's talk about depreciation. Depreciation is a fairly misunderstood tax concept that if a dental practice owner can understand this better, they'll be able to sift through some of the.

Some of the language and comments that are made to them from their cpa, maybe even from their dental supplier as well, who's talking about buying equipment. And so I want to clarify for you in a few minutes, what is depreciation exactly, and how do we plan accordingly with depreciation in your practice? And the reason why this is so important is because depreciation is the deduction of over time of your equipment and other, what are called fixed assets. As a dental practice owner, you have a lot of equipment. You have sensors, you have chairs, you have cabinetry. You might have a CAD cam, you might have a CT in your practice. You also are going to have furniture and fixtures, and you're going to have some computers as well. You might have new computers or a computer in each of your operatories. You might have a server on site. Most of you do have a server on site. You'll have leasehold improvements where you put up a wall here and you build new floors here and you have a new AC or you do a remodel. And all of this, all of these things that you're having large cash outlays to that give you benefit for a long period of time, for years. What the IRS says is in most cases, other than an exception called the Section 179 deduction, what's called bonus depreciation, which we'll talk about. In most cases, by default, you have to deduct or you get a tax benefit little by little over years of after you, after you acquire or buy that equipment. It's not like you buy some dental supplies in your office that you're sort of using every day with your patients. You get to deduct that because you're using it pretty much right then and there shortly after you buy it. But when you go and you buy a dental chair and that thing's going to last you 10, 12 years, even more, the IRS says, Whoa, whoa, whoa, you can't, let's say you pay $10,000 for that nice dental chair. You can't go and deduct $10,000 of that dental chair right now. And you're thinking, well, why not? I bought it. And the IRS is saying, because you're going to get a benefit out of that over a long period of time. And so we want you to get the deduction that matches the use or the benefit out of that. Now, they make a lot of exceptions here for small business owners to get an earlier deduction on that. And I'm going to talk about that in one second. But before I do, notice that each of these different categories of fixed assets have a different deduction period. So let's look at your dental equipment, for example. Let's look at dental chairs, CAD Cam, Connecticut, you buy some loops. What the IRS has defined here is five years. We're going to deduct that over five years. So if you buy something, let's say you buy cad cam for $100,000, then you're going to deduct that. And in a straight line deduction, you would get 20,000 deduction. And every year, which means your taxable income is going to get lowered by that amount, by $20,000 and you pay less. So you're actually think of it this way. So your K1, your profits in your corporation are going to be less because you got a deduction for depreciation. And if you're K1 and your profits are less, when that flows through to your 1040 tax return, you're going to pay less in taxes. Deductions are good. Deductible depreciation is a form of a deduction and it's simply the little by little installment of that, the purchase of that equipment deduction over time.

And so they say five years. Now, it's not actually straight line. It's not going to be twenty thousand, twenty thousand, twenty thousand, twenty. That's twenty thousand. Instead, most of the depreciation occurs in the first half of, of the depreciable life of that asset. So if you buy that CAD CAM within the first three years, you will have seen most of the deduction by that point. Just because the IRS says you're getting the most of the value in the early years and in a way you're matching the benefit with the deduction. And so that's the way, that's the way it is. It's called a maker's depreciation schedule. And don't worry about that name exactly, but just know it's that you get a lot more of the depreciation in the early years. So in this case, dental equipment, it's really years one, two and three when you're getting the larger share of the depreciation. And then by year five, you're not getting that much. Furniture and fixtures have a depreciable life of seven years. Computer equipment has a depreciable life of five years. And leasehold improvements have a depreciable life of 15 years as of today, 20, 20.

These things change. They change periodically. Most of that will stay the same for a while, I anticipate. So leasehold improvements, you don't get. It's just a little deduction year by year over 15 years. Now, in one of our other modules, you learned that when you are buying the practice, when you're acquiring a practice, one of the most important.

I'll say, exercises or activities in that negotiating process is how you allocate the purchase price among these different assets, because it has an important tax effect to both the seller and to you. And we talk about who wants the allocation to which one of these. And then there's this one that's intangible, an asset that you can't actually touch, called an intangible asset, and that's known as goodwill, and that's deducted over 15 years.