The Depreciation Schedule - Uh, The What...?
MOST IMPORTANT DOCUMENT
I really do think the tax return is most important document you can look at when you are buying a dental practice. However, many doctors stop their analysis too soon and don’t look at the Depreciation Schedule.
WHY YOU SHOULD BE INTERESTED IN THE DEPRECIATION SCHEDULE
Why should you interested be interested in the Depreciation Schedule? Well, mostly because it tells you the AGE of the dental equipment, something you might find informative or useful when buying a practice.
Time flies when you are having fun! If a seller tells you his dental chairs are 5 years old, you can quickly check the accuracy of that number by looking at the Depreciation Schedule on the seller’s federal corporate tax return. Sometimes sellers think it was 5 years ago when they bought those chairs, when it is really 10 years. As they say, numbers don’t lie!
WHERE DO YOU FIND THE DEPRECIATION SCHEDULE?
Where do you find the schedule? Starting with the first page of the seller’s federal corporate tax return, page back until you see it. You’ll know you’ve found it when, after paging back maybe 10 or 15 pages, you come across some pages that are turned “wrong.” The Depreciation Schedule is almost always in landscape mode rather than portrait mode like the rest of the tax return is – that is, it is printed longways. Also, every page is generally titled Federal Depreciation Schedule.
If a seller is not incorporated, and you are looking at their personal tax return, the Schedule C, it can be a bit harder to find and may not be turned sideways. But, in that case, it is usually right behind the Schedule C.
Another way to tell you are in the right place is that you will see a list of items you’ll recognize on the Schedule, and not just a bunch of numbers. You should see things like: dental equipment, a dental chair, a computer system, an x-ray unit, compressor, etc.
WHAT SHOULD YOU LOOK FOR ON THE DEPRECIATION SCHEDULE?
Bottom line, for our purposes, you are looking to find the age of the dental equipment and other assets of the practice, like the compressor, vacuum, front desk computers, etc.
So, get some kind of ruler or straight edge, go item by item and note that it tells you. You’ll see:
The item, and a description of the item.
The date the item was acquired – which means the age of the item, assuming it was bought new.
The basis of the item, which essentially means the purchase price. Most of the time it will say the AMT basis, which means the Alternative Minimum Tax basis. For our purposes, basis means purchase price.
DON’T GET TRIPPED UP!
Now, one way you can get tripped up when trying to determine the age of different items (known as “assets”) is that if the seller bought the practice – rather than buying the equipment new themselves. In that case, the date “acquired” would be the date the seller bought the practice, or bought the item used - not the actually age of the item. You’d have to get the previous seller’s tax returns from the current seller to know that age for sure.
Also, you’ll see a lot of other numbers and those numbers are basically how a seller is “writing off” a certain item. This doesn’t apply to you – and you will have your own schedules for write offs.
So you don’t need to pay attention to anything but:
The date Acquired
The basis – which means the purchase price.
CONCLUSION- THE TAX RETURN IS THE MOST IMPORTANT DOCUMENT!
Are you starting to understand why I think the Tax Return is the Most Important Document? As the saying goes, numbers don’t lie – and they actually pretty much tell the whole story!
Make sure to listen to my podcast episode about the Depreciation Schedule below!!
You can subscribe to my podcast "Dentistry Rising" on iTunes, Spotify, Stitcher and a lot of other podcast players.