In the last issue of Orthodontic Products magazine, in the article “You Want It, But Why?,” we discussed the three most common motives for investing in new technology: 1) becoming more profitable, 2) improving patient care, and 3) enhancing the orthodontist’s lifestyle. Now in Part 2, we explore three additional issues that should be considered before entering the exhibit hall at the American Association of Orthodontists Annual Session in Washington, DC, this May. These include tax deductions, the timing of technology purchases, and the effect of technology on the sale of a practice.
So let’s look at what role these factors should play in your decision to make a major purchase.
Understanding Tax Deductions
Perhaps one of the most misunderstood aspects of buying technology like optical scanners, x-ray equipment, or 3D printers is the effect that such purchases will have on one’s tax bill. It is not uncommon for salesmen to suggest that the technology they are selling can be “written off” by an accountant, implying that the tax benefits incurred will offset the entire cost of the purchase. Orthodontists are often asked if they have taken advantage of their Section 179 Tax Deduction for the year, as if they would be wasting money if they don’t buy something with it. Without a clear understanding of how deductions actually work, it is easy to be misled by such language.
Practice Cash Flow. Remember that when technology is purchased, a practice must pay the entire cost regardless of how or when it is deducted. While the savings created by the deduction may reduce the tax liability later on, purchasing the technology will affect cash flow immediately. Therefore, if a practice is not in a financial position to afford an item, it should not be purchased regardless of the promised tax benefits. The effects of large purchases on a practice’s cash flow should always be discussed with an accountant beforehand.
Real Value of Deductions. A second important concept is that the amount saved on taxes will never pay for the entire cost of the equipment. While there is a real tax benefit, it represents only a small percentage of the purchase price. The actual tax savings are equal to taxes that would have been paid on the amount of the purchase had the orthodontist taken the money as income. For example, the tax savings on a $100,000 x-ray machine is equivalent to the tax on $100,000 of profit. An orthodontist in the 35% tax bracket pays an effective tax rate of about 25%. Therefore, the tax savings would be about 25% of $100,000 or $25,000. While this represents a nice deduction, the net cost of the technology will still be $75,000 rather than $0. Tax deductions reduce the cost of major purchases, but they do not pay for them.
Timing of Tax Deductions. If a piece of equipment is to be purchased, getting the advice of a tax professional regarding when the deduction will be taken is also important. For example, U.S. Tax Code 179 currently allows an equipment deduction for new or used equipment of up to $500,000 that can be taken in full in the current calendar year or spread out over a 5-year period. The best approach varies by practice, and mistakes in how and when deductions are applied can result in substantial savings or losses.
For example, an orthodontist in a mature practice with a stable income may benefit by deducting the entire cost of a purchase all at one time. Because his tax rate is expected to remain stable over the next 5 years, there would be no advantage to delaying the deduction. In growing orthodontic practices where income is expected to increase over the next 5 years, however, it may make more sense to defer some of the deduction until the orthodontist is in a higher tax bracket. Because this orthodontist’s tax rate will be increasing, deducting the cost of the equipment will result in greater tax savings.
In summary, the benefits of tax deductions can be considered when buying new technology, but “creating a deduction” should never be the motivation behind a purchase. Deductions will reduce an orthodontist’s tax liability, but the need for the technology and practice cash flow are more important considerations.
Investing to Be Competitive
Some orthodontists feel they need to invest in new technology to be competitive. They are led to believe that without CBCT or an optical scanner, they will not be able to attract patients because so many other offices around them own these already. Young orthodontists just starting out feel their practices won’t grow without it. Mature orthodontists who notice a decline in their practices as they age may feel they need to upgrade their technology to attract young families again. Those in the middle wonder if their practices will grow if they invest or decline if they don’t.
Who Owns Technology? What is the actual prevalence of big-ticket technology in the orthodontic marketplace? Cain Watters and Associates (CWA) is a CPA firm that specializes in accounting services for dentists. Orthodontists represent their largest specialty group. A 2016 survey conducted among their orthodontic client base revealed the following statistics: 92% use clear aligners, 77% own an intraoral scanner, 62% use self-ligating brackets, and 32% own a CBCT machine. These numbers give a more realistic idea of how many practices currently own this technology.
Timing Is Everything. CWA financial advisors are regularly asked by their clients to help them make decisions regarding the appropriateness of investing in expensive technology. Although there are always exceptions to the rule, their advice usually correlates with the financial stability of the client. Consider two clinicians at different stages of their practice life.
A new orthodontist who has heavy educational debt, a small practice, and a schedule that can accommodate additional growth will usually be advised to keep their overhead low, pay down their educational loans, and grow the practice by working to filling their schedule with new patients without purchasing expensive technology. At this stage of their career, these clients have more time and capacity than they do money. For them, purchasing technology to become “more efficient” makes less sense.
At the other end of the spectrum is the client who has retired their educational debt, has a practice with more income, and has less availability in their schedule. For this orthodontist, CWA advisors will usually advocate investing in technology that makes practices more efficient and facilitates seeing more patients in less time. These are also the practices for which stress-reducing technologies make the most sense.
While the prevalence of technology in orthodontic practices will increase with time, buying expensive equipment early or late in one’s career just to become or remain competitive may not be the right decision. Before any such investment, CWA suggests that orthodontists discuss their plans with their financial advisors. The discussion should address the desired outcome of the technology purchase, the financial impact the acquisition will have on their practice, and how the added expense will affect the orthodontist’s financial and lifestyle goals. Including the practice’s financial team in the purchasing decision can help to avoid costly mistakes in timing, financing, and tax burden.
Does Technology Affect Practice Transitions?
As mentioned in the discussion on competition, many mature orthodontists get interested in upgrading their technology as their practices age. This not only stems from wanting to remain competitive in the marketplace, but also from a desire to get the best price for their practices when they are ready to sell. Chris Bentson, of Bentson Copple & Associates, has performed more than a thousand practice valuations over the past 3 decades. In his experience, while the location, appearance, and modernization of a practice do affect its value, it is generally better not to invest in expensive equipment just before putting it on the market. Doing so may not improve its salability and could adversely affect cash flow which will actually decrease the practice’s valuation. If a practice does not have the most current technology, that will simply be factored into the asking price. Bentson recommends selling “as is” and leaving the decision regarding the acquisition of new technology to the purchasing orthodontist.
Conclusion
Shopping for and buying new technology is an exciting event for an orthodontic practice. Decisions on what and when to buy should be based upon financial, clinical, and lifestyle factors and not emotion. While orthodontists should claim all available tax deductions, they should never purchase an item merely to create one. The decision on when to make a major purchase varies according to the financial stability of each practice and should be discussed with the practice’s financial team. Finally, orthodontists selling their practices should avoid the temptation to make expensive technology upgrades solely to make their practices more appealing to buyers. OP
This is the second part of a tw0-part series looking at the rationale and financial implications of a major technology purchase. Click here to read Part 1 which asks you to examine how you justify major technology purchases for your practice.
Greg Jorgensen, DMD, MS, owns a private practice in Rio Rancho, NM. He served as the chairman of the American Association of Orthodontists (AAO) 2017 Winter Conference where the theme was “Technology: Balancing Profit, Lifestyle, and Patient Care.” He also served as the general chairman of the 2016 AAO Annual Session in Orlando, Fla.
Charles Loretto is a partner and investment advisor representative at Cain Watters and Associates. He regularly speaks to dental schools and residency programs, study clubs, dental symposiums, and state and national dental meetings. As a partner of National Dental Placements, his team aids in the practice transition process; and as a partner of Elite Dental Alliance, his team leverages the buying power of its members to help dental professionals save on everyday business purchases like corporate dentistry can.
