Jan 11, 2016
“Much Ado About Nothing” (the over-hyped Section 179)
Written By: Nate Williams
Here’s the summary; do these things and you don’t have to read further:
- Don’t ever spend money just for a tax deduction
- Buy equipment in your practice when it makes business sense to do so; ignore taxes in this analysis
- When your equipment rep starts talking about section 179, smile and show him the door
- Set a goal to pay as much in taxes as you can (What!? Did my accountant just tell me I should pay MORE taxes??)
December has to be the best month by far to be a dental equipment sales rep. They must love walking into doctors’ offices, showing off their fancy toys, and then saying those magic numbers that make every dentists’ ears ring: 1 – 7 – 9.
When that happens, the dentist wisely calls his run-of-the-mill accountant who thinks, ‘crap, I have no idea how much this guy is going to owe in taxes.’ Then the behind-the-ball accountant says, “sure, buy the equipment, that sounds like a wise purchase, doctor.”
At PFG, because we care about more than just how much your tax bill is going to be, we think about things a little differently. And you’ll be wealthier for it. Here’s why:
Section 179. We get calls from clients all the time asking us if we’ve heard of section 179, this magical financial pill their equipment rep mentioned. Yes, in fact, we have. Section 179 of the IRC allows the taxpayer to expense the purchase of qualified equipment in the year of purchase as opposed to depreciating the cost of the purchase over several years (typically 5-7 for equipment). We know about it, and we also know that section 179 is a bunch of hype.
Why section 179 is a bunch of hype. Smart doctors don’t spend money just to get a tax deduction, ever. They only buy when they think the purchase will give them a positive economic return (which leads to more taxes in the future). When do they buy? We tell our clients to buy what they need to make money in their practice when they need it and to not be swayed by supposed tax deductions. So our clients, unless there is a business demand, aren’t running around trying to spend money in December.
Section 179 is also overhyped because there is no extra tax deduction. With or without section 179 you still get the full tax deduction; with 179 you just get it a little faster.
Additionally, (and here is where things get complicated) unless you have adequate “basis” in your corporation, you won’t be able to take the section 179 expense anyways.
Why you should set a goal to pay as much in taxes as you can: Write this down: if your primary financial goal is to minimize taxes, you will not likely become financially independent. At a minimum, you will be a much less wealthy version of yourself. My personal financial goal, with regard to taxes is to follow the law and pay as much as I can, perhaps surpassing Zuckerberg for the largest tax bill in American history. OK, perhaps I’m not FaceBook IPO material, but with an income tax the more income you have the more taxes you pay. And isn’t the goal to increase income?
Never Spend Money for a Tax Deduction. In order to get a tax deduction you have to spend money. The deduction allows you to reduce taxable income by the amount of the expense. This is no different than buying something on sale: if you’re in a 40% tax bracket, then you essentially get everything the business buys at 40% off. But you still have to pay the 60%!
I recently received a call from a client (of course this was in December). He told me of another doctor who “needed to spend money before year end to reduce his taxes.” So this poor sap (the other guy) was going to buy a brand new cone beam ct scanner; and he was offering to sell his other cone beam that was only a few years old, to my client at a great price. Our client benefited not only from avoiding the 179 hype, but also capitalized on the mistakes of the other guy.
There aren’t many rational people who think, “I really want to save money today, so I’m going down to the mall where they’re having a big sale.” Personally, I like to brag that “nobody in America has saved more money than me on Black Friday!” (I’ve never bought a thing J)
The “Tax Trap” and section 179. One pernicious financial pitfall is what we affectionately refer to as the tax trap. The tax trap is where you don’t have enough money to pay your taxes during the year, so you work into the following year to pay last year’s taxes; and by doing this, you incur more tax. So the more the poor doctor works to pay taxes, the more taxes he has to pay. Just believe me that you don’t want to fall into the tax trap – no fun.
The problem with section 179 is that it oftentimes pushes doctors into this situation. Here’s how:
- Doctor buys a bunch of equipment on debt, of course, and expenses it all through section 179. He’s happy to owe so little in taxes, the equipment rep is happy, and the CPA gloats like a genius.
- In later years the doctor has very little cash because he is paying so much on debt service. But he doesn’t have any deductions either because he took the 179 expense so he has a high taxable income and corresponding tax bill.
- He doesn’t have the money to pay his taxes and therefore falls into the tax trap.
Please take this advice; you’ll be healthier, wealthier and wiser if you do.