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 fi xed asset over its useful life. Simply put, you match the cost of acquiring an asset with the years the asset earns revenue. For instance, if the tax code indicates a piece of equipment should last fi ve years, the taxpayer is allowed to deduct a fi fth of the cost of the equipment on the tax return. This deduction for depreciation will be allowed for a period of fi ve 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 fi ve years, when you need tax savings in the current year, is not that exciting. Generally, when developing an eff ective 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 effi cient 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 fi ve years maximizes the immediate tax savings.
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 coff ers. Let’s walk through the basic tax equation, from revenue to cash fl ow:
Revenue – Expenses = Taxable income Taxable income – Income Taxes = Income Income – Debt Service = Cash Flow
This equation calculates taxable income and determines net cash fl ow. For most of my clients, and probably for you, cash fl ow 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.
Let’s look at another example. Scenario 1 Scenario 2
Revenue Less: Expenses
$908,553 $908,553 (557,289) (557,289)
Less: Section 179 Deduction — (300,000) Equals Taxable Income Less: Income Taxes (30%) Equals Income After Taxes
351,264 51,264
(105,379) (15,379) 245,885
35,885
Add: Section 179 Deduction — 300,000 Less: Debt Service
Equals Net Cash Flow
(62,496) (62,496) $183,389 $273,389
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 veterinary practice, one of the more common tools available in tax planning is a section of the federal tax code known as “Section 179.”
TRENT WATROUS is a dental specifi c CPA in Nashville, Tennessee, with Whisenant, Stewart, Watrous & Associates, PLLC. He works closely with dental clients in accounting, tax, transition, practice start-up and problem solving matters.
www.wswcpas.com
46 pattersontoday | Fall 2016 Fall 2016
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