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Need equipment? Buying at year's end can cut taxes
End-of-the-year sales aren't limited to just retail goods.
The fourth quarter of the year is when many publicly traded companies prop up their performance records to show more favorable year-end results.
Principals in many veterinary practices have been known to "cook the books" of their smaller, more closely held operations, too, by taking advantage of the tax rules for year-end equipment acquisitions.
Whether you are thinking about tax savings or merely are in the market for new equipment, the end of the year is a good time to consider acquiring that equipment.
Most practices can benefit from a full year's worth of write-offs with only a month or two of payments, limiting the actual cash outlay for that new equipment while generating significant tax deductions for 2008. And, there is a 50 percent bonus depreciation deduction available for the purchase of qualifying property.
By waiting until January, you would miss the current year's Section 179 deduction — a whopping $250,000 maximum.
A year-end tax strategy is simple in theory: Take maximum advantage of tax deductions in years when taxable income is high, and defer as many deductions as legally possible in those years when income is down.
Others achieve year-end tax savings using this simple formula: Defer as much income as possible to the coming year, while making as many purchases as possible in the current year.
Optimizing either formula requires constant tax awareness, but remember that taxes should not be the only reason for equipment acquisitions. If the furniture or equipment — even a new vehicle — is needed, then a veterinary practice or its principal in the 25 percent tax bracket effectively can reduce the cost of those year-end purchases by 25 percent in a few months.
Section 179 deductions
Among the rebates and business incentives in the Economic Stimulus Act of 2008 is a provision that nearly doubles the amount of deductible expensing under Section 179 — to $250,000. At the same time, the threshold for reducing that write-off increased from $510,000 to $800,000. Unfortunately, it applies only to property purchased and put into service in 2008.
The new, temporary, rules make no changes regarding the types of property eligible for expensing. Generally, it must be tangible, or real, property used more than 50 percent for business purposes, and newly acquired.
Computers, telephones, telephone systems, copiers, office furniture and similar equipment are among the items that qualify; a complete list is in the IRS literature and on its Web site, www.irs.gov. Investment property, of course, does not qualify for depreciation, let alone for Section 179 write-offs.
A bonus for 2008
Early in 2008, Congress resurrected a bonus depreciation as part of the so-called rebate-law changes in an effort to encourage business investment. The new law provides qualifying taxpayers a 50 percent bonus depreciation of the adjusted basis of qualifying property acquired in 2008.
To claim bonus depreciation, property must be (1) eligible for basic depreciation (the modified accelerated cost recovery system or MACRS), with a depreciation period of 20 years or less, (2) computer software (off-the-shelf) or (3) qualified leasehold property.
Borrow or lease?
Will the new equipment be purchased with borrowed funds? Or would it be more advantageous to lease?
Leasing might mean losing the tax benefits of first-year, Section 179 write-offs as well as the 50 percent bonus depreciation allowance.
Instead, the veterinary practice gets an immediate tax deduction for all lease payments.
The tax advantage under financing a purchase or leasing depend heavily on the situations of both the veterinary practice and its principal. By no means, however, should the decision be based solely on first-year, out-of-pocket outlays.
Up front, out of pocket
Whether a practice will have the profits to take full advantage of year-end tax breaks and can afford the out-of-pocket costs of buying or leasing equipment will become apparent only toward the end of the tax year.
With a loan, a down payment of 10 percent or more typically is required. However, when planning year-end acquisitions, why not investigate seller-provided financing?
A large institutional lender looks at a practice's financial history and prospects. In the event of loan default, the lender would repossess the equipment. But, what would it do with that equipment and at what price?
Dealer, manufacturer or seller financing might be more expensive, but the up-front money usually is less. Why? Because in the event of default the seller is in position to re-sell the equipment more efficiently and at a lower cost than a financial institution.
Leasing involves certain upfront costs, too, such as the first and last payments. Sometimes it's possible to lease without an upfront payment, but most advance payments under a lease are less than a typical loan down payment.
Although credit requirements are getting tighter on traditional loans, interest rates are at historic lows. The rate is explicitly stated in a loan agreement, but under a lease the implicit finance charge rarely is disclosed.
Because of the various ways leases may be structured, it may be difficult to determine the true interest rate. Still, it's important always to ask.
Principals in veterinary practices or other businesses operating as limited liability companies (LLCs), S corporations or partnerships may qualify for a Section 179 deduction, the 50 percent bonus depreciation or other tax breaks, both on the practice's taxes and their personal taxes. But, because many states restrict certain deductions, it's best to consult a tax advisor.
While it may be true that discounted fees, special promotions, postponed payments to vendors and/or suppliers, stepped-up collection efforts and other fourth-quarter gamesmanship can contribute to a banner year, the greatest long-term savings come from a reduced tax bill.
In 2008, year-end equipment purchases (YEEPs) are the way to go. Whether you buy or lease, any needed equipment added to a veterinary practice before the end of this tax year can be rewarding.
Battersby is a tax consultant in Ardmore, Pa.