Written By Travis Hornsby, CFA®, CFP®
Updated on July 26, 2024
Dentists have perhaps the easiest and best path of all professionals to lower their taxes through depreciation with practice ownership. Depreciation allows you to expense an asset over time to account for the replacement need of that asset.
Realistically, though, lawmakers change the tax code to change depreciation rules from time to time to juice the economy at key moments, reward key constituencies and more.
That makes depreciation as a dentist a constant struggle as you try to keep up with the changes. If you know the current rules and opportunities, you might even pay less in taxes as a practice owner than you would as an associate despite earning more money.
Here are some key types of depreciation write-offs to know as a dentist, along with some examples to help you visualize the benefits.
Depreciate your dental practice building
If you purchase the building where you practice, you can write off a portion of the building cost each year.
Corporate depreciation in the U.S. is a 39-year straight-line approach. That’s about 2.5% of the building cost annually.
For example, suppose you bought your practice building for $1 million. Each year, you could write off about $25,000 against your taxable income (2.5% x $1 million = $25,000).
Let’s say you finance this purchase through a bank at 6% interest over 30 years. Your interest cost in the first year would be about $60,000.
You get to write off this interest expense, too.
With depreciation and interest expense, you could get about $85,000 a year in write-offs even though your total payments are about $72,000.
That means you’re writing off more income than the building costs while building equity.
Of course, if the purchase price of the building is too high, you could lose a lot of money. In that case, buying your practice building would be a poor investment.
That said, the tax benefits of purchasing your practice building are good enough that if you plan to work at that location for a long time, you should probably buy the building.
Related: Dental Practice Financial Planning
Depreciation for dental practice equipment
Under a standard depreciation schedule, you must list the equipment you buy for your practice above a specific dollar amount as an asset and expense it (i.e., depreciate it) over time.
Consider a CBCT or CEREC machine. In a normal situation, you might depreciate it over a three-, five- or seven-year period.
However, practice equipment isn’t the only thing that a practice owner can depreciate. You can often write off the following types of investments through depreciation:
- Technology
- Software
- Equipment (mentioned already)
- Heating and AC systems
- Office furniture
- Roofs
- Vehicles
This is a pretty extensive list. However, the great news for practice owners is that many of these types of investments qualify for a special type of depreciation under the current tax code.
It’s called Section 179.
Section 179A deduction for practice owners taking bonus depreciation
The downside of a seven-year standard depreciation schedule is that you might have an exceptional year with high income, which may not always be the case.
Hence, taking more depreciation upfront to get the tax benefits today instead of tomorrow can be very attractive.
This is particularly true for dentists with student loans, as depreciation lowers your taxable income and thus lowers your payments on income-driven repayment (IDR) plans.
Section 179 is thus a very attractive proposition for a dentist practice owner.
It’s basically bonus depreciation that allows you to expense an asset faster and get a tax benefit sooner.
Should you take the depreciation upfront?
The Tax Cuts and Jobs Act (TCJA) is what really drove this use of Section 179.
The first-year bonus depreciation for 2024 is 60%, but that falls to 40% in 2025. After 2025, the TCJA expires, and the new tax regime will be uncertain.
That’s one reason why taking the depreciation upfront is usually preferable — you don’t know for sure if certain types of purchases will be deductible in the same way in the future.
Example of 179A bonus depreciation
As an example, let’s say you buy a piece of equipment for $100,000. If you get 60% bonus depreciation, you’d take 60% of the $100,000 equipment and write it off (on top of any normal year-one depreciation expense).
So, the tax deduction would be at least $60,000.
If you’re a student loan borrower making $200,000 a year in California, you’d save 50% in taxes and IDR payments on that $60,000 deduction. All in, 179A could save you about $30,000.
Get expert help for practice owner dentists seeking to build wealth
Our dental specific group at our SEC Registered Investment Advisor SLP Wealth can be a key asset in helping you figure out how the depreciation of your assets could save you money on taxes and build wealth faster.If you’re interested in joining, check out the link here.
