Time Well SpentTime Well SpentTime Well Spent
Spring 2016 IssueFall 2016
Return to Fall2016
Understanding Section 179 Tax Code
From the perspective of a CPA, few topics get a client more excited than creating a tax savings strategy or informing them of a refund. In dentistry, one of the more common tools available in tax planning is a section of the federal tax code known as “Section 179.”
Section 179 explored
The tax code allows all purchases of equipment and technology to be depreciated – an accounting method of recognizing the cost of a fixed asset over its useful life. Simply put, you match the cost of acquiring an asset with the years the asset earns revenue. For instance, the tax code indicates a dental chair should last five years, so annually a taxpayer is allowed to deduct a fifth of the cost of a dental chair on the taxpayer’s tax return. This deduction for depreciation will be allowed for a period of five years, until the cost has been recognized or fully depreciated. Easy enough.
But let’s add some complexity to the equation. Getting a deduction across five years, when you need tax savings in the current year, is not that exciting. Generally, when developing an effective tax strategy, a CPA seeks ways to bring deductions to the current tax year to reduce taxable income, which in turn reduces taxes owed in the current year. Essentially, an efficient tax strategy keeps cash in the hands of the client and out of the hands of the government for as long as possible. Therefore, in the concept of depreciation, taking the full deduction in the current year versus five years maximizes the immediate tax savings.



Email this storySHARE
Although the tax code provides for the deduction to be over a period of years, the same tax code allows for a full deduction in the current year within code Section 179. That’s more cash in your checking account and less in government coffers. Let’s walk through the basic tax equation, from revenue to cash flow:
Revenue – Expenses = Taxable income Taxable income – Income Taxes = Income Income – Debt Service = Cash Flow
This equation calculates taxable income and determines net cash flow. For most of my clients, and probably for you, cash flow is what the equation is all about.
But for a moment, let’s put on a tax strategy hat. Increasing the deduction in the current year decreases taxes. When you purchase equipment, chances are you also have a deduction that allows you to reduce income taxes.