An expert guide to expensing equipment purchases
New tax laws make it easier than ever to collect deductions on new veterinary equipment.
The last week of 2010 gave us the Tax Relief Act of 2010. Among the many changes to the laws were some of the most liberal rules for expensing equipment purchases I've ever seen. For the most part—at least for federal taxes—many veterinary practice owners will be able to expense all of their equipment purchases in 2011 under IRS Code Section 179 or with bonus depreciation.
A LOOK AT NEW LAWS
First of all, the Section 179 deduction for tax years beginning in 2010 and 2011 has increased, allowing business owners to expense fixed asset purchases up to $500,000. The deduction phases out as purchases exceed $2 million.
The Tax Relief Act also provides that for tax years beginning in 2012, a small business taxpayer can write off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once these expenditures exceed $500,000. After 2012, the maximum expensing amount will drop to $25,000 and the phase-out level will drop to $200,000. The new rules also treat off-the-shelf computer software as qualifying property through 2012.
But Section 179 has limitations. The most significant is that you can't take a deduction if it creates a loss for your practice. This applies to both new and used equipment.
AN ALTERNATIVE FOR YOUR ASSETS
If you can't use the Section 179 deduction, you can utilize bonus first-year depreciation. Between January 1 and September 8, 2010, this was restricted to 50 percent of the asset's original cost. The Tax Relief Act extends depreciation to 100 percent of the cost of assets placed in service between September 8, 2010, and December 31, 2011. Bonus depreciation has no taxable income limits and can create a loss for the practice. In 2012, bonus depreciation will revert back to 50 percent of the asset's cost.
Keep in mind, though, that bonus depreciation applies only to new equipment. If you're purchasing a practice and buying the equipment from the former owner, you'll only be able to take advantage of the Section 179 deduction. If you're starting a practice and buying new equipment, you can utilize a full write-off without limitation, so it won't matter if you incur a loss from your first year of operation—you'll still get an equipment deduction.
For example, let's say you start a practice and you've purchased $90,000 of new equipment. Your first year's taxable income is $3,000, and you elect to use bonus depreciation. You now have an $87,000 taxable loss that you can use to wipe out the remainder of your income for the year. If you can't use it all, you can carry the loss back two years or forward 20 years until you do use it.
RULES FOR RENTERS
If you're making qualified improvements to a building you rent, you can take advantage of both the Section 179 deduction and bonus depreciation. (Qualified improvements are those you make to the interior of the building, which must be more than three years old. Improvements to elevators or escalators, internal structural framework, or enlarging the building don't qualify.)
Leasehold improvements of $250,000 qualify for the Section 179 deduction. They also count toward the $500,000 cap for all expenditures. So if you elect to use $250,000 on leasehold expenditures, you then have $250,000 remining for equipment purchases. Leasehold improvements also count toward the $2 million expenditure cap for the phase-out of qualifying expenditures.
One final caveat: While these incentives look very enticing on the federal level, your state may not allow the same incentives. Review these rules with your tax advisor to make sure you're getting the benefits you expect.
Veterinary Economics Editorial Advisory Board member Gary Glassman is a partner with accounting firm Burzenski and Co. in East Haven, Conn.