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Accelerated Depreciation: Opportunity or Landmine?

Growing a dental practice by investing in new, high-technology equipment is one of the best strategies to ensure the success of the business.

Interest rates are still very low and business loan interest is also tax deductible. In addition, investment in the newest technology can provide a practice an advantage over its competitors, both in marketing and quality of care.

While taking a big tax deduction on equipment in the year of purchase can be a huge benefit to a dental practice, it also has the strong potential to become a five-year financial burden from which some practices can never recover. As such, the cookie-cutter approach to accelerated depreciation can cripple the growth of a practice.

How is this possible? Accountants love to talk about the time value of money, and it’s true that a deduction today is worth more than the same deduction next year. But what happens in three years when the equipment loans are still being paid off, taxes have gone through the roof, and the loan principal payments are not tax deductible? Will the practice have had enough growth by then to sustain that amount of cash outflow? Does it make sense to save fifteen cents on the dollar today when the business could be in a higher tax bracket next year?

The answer is maybe. It is not a simple question, and careful consideration and planning is the key. Personal cash flow needs, business loan payments, projected practice growth, and many other factors all play into determining the best strategy for new equipment or practice purchase.

To avoid the landmines and make the most of technological investment opportunities, it is important to consult with a dental-specific tax advisor. There are too many variables and too much at risk to use the cookie-cutter approach.