Many dentists are surprised that they still have a large tax bill even after spending so much on office upgrades. The reason for this is that some purchases can’t be written off right away. In general, tax write-offs fall into two categories: current and capital. Current expenses are those that you can claim a full tax deduction for right away. For example, rent, utility bills and employee salaries. Capital expenditures have
to be claimed over a longer period of time. Examples of these include dental equipment, computers and buildings. If you are looking to upgrade your office to comply with infection control protocols or just make general upgrades, here are some tips to consider to reduce your after-tax costs.
Lease versus buy
Many dentists find leasing to be an attractive option because it’s easy to understand. The amount you pay each month towards your lease is the amount you can write-off. If you spend $1000 a month to lease equipment, you can claim a $1000 tax write-off. Compared to buying equipment, dentists have a much better grasp of the tax implications of leasing.
With buying, it’s difficult to understand just how much can be written off each year. The CRA doesn’t make it easy as each item you purchase has to be categorized and each category has a maximum amount that can be written off. For example, dental equipment can only be written off at a rate of 20% per year whereas computer hardware can be written off at a rate of 55% per year.
The decision to lease or buy shouldn’t be made based solely on taxes, you should ask the following:
1. What’s the interest rate being charged? There’s often an implicit/hidden interest rate charged with leasing which may be higher than buying the equipment/upgrades using a traditional loan or line of credit from the bank which is typically at prime.
2. Do I have excess cash that is sitting idle (i.e. not earning interest)? If yes, consider using this cash to buy equipment/upgrades.
3. Do I intend to pay off the lease and/or loan fast? If yes, consider taking out a loan to buy equipment/upgrades as leasing often has a penalty built in for paying off the lease early.
Specify what you are buying
Not all purchases receive the same tax treatment. You may think you are spending a hundred thousand dollars on equipment when, in fact, some of it may be for computer hardware, software and training on how to use the equipment. Breaking down a purchase into its components could result in more tax relief than simply leaving it all as equipment. Consider the 2 scenarios below:
Both scenarios require you to pay $100,000 for the upgrade, but scenario B allows you to take advantage of more tax-write offs.
In addition, certain upgrades/services are considered current expenses by the CRA. For example, painting and landscape work is considered a repair and maintenance item which is 100% tax deductible in the year you purchase the services. Getting the details of your purchases on the invoice can help reduce your taxes.
Time your purchase
The timing of your purchases will have a greater impact this year as the government has introduced a new “accelerated investment incentive.” Purchases made after November 20, 2018 can be written off three times as fast in the year of purchase. If you are going to upgrade, make sure to do so before your year-end. This will allow you to claim tax-write offs right away. If you upgrade after your year-end, you have to wait a whole year before you get any tax breaks. This could put you in a cash flow crunch as you’ll have spent money on your upgrades but will not receive any tax breaks for them, until later. Consider the chart below.
Impact of accelerated Investment Incentive on depreciation expense
|Before November 20, 2018||After November 20, 2018|
|Capital Asset||Tax write-off % in 1st year||Tax write-off % in 2nd year and beyond||Tax write-off % in 1st year||Tax write-off % in 2nd year and beyond|
|Equipment and furniture||10%||20%||30%||20%|
|Leaseholds||Up to 10% of original cost||Up to 20% of original cost||Up to 30% of original cost||Up to 20% of original cost|
|Building (non-residential)||2% or 3%||4% or 6%||6% or 9%||4% or 6%|
With the new rules, a $100,000 equipment purchase made after November 200, 2018 would result in an immediate tax deduction of $30,000 instead of $10,000.
Determine who the purchaser should be
If you own the dental building, consider whether an upgrade to the office is a leasehold improvement or a building improvement. For example, electrical, roofing or plumbing may actually be upgrades to the building. The tax-write-offs are greater for leasehold improvements, but in many cases if you are the landlord, you are also registered for HST in which case you will be able to claim back the HST paid
on the upgrade. You need to weigh the tax benefits of writing off leasehold improvements faster versus being able to claim HST on the purchase as the landlord.
The tips provided should make upgrading your office more manageable. However, it’s important to remember that the decision to upgrade your office should always be made with the intent of increasing the benefits for you, your team and your patients.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail firstname.lastname@example.org / email@example.com / firstname.lastname@example.org . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.