If surgery is your game, this may be the year to ante up some cash and go shopping. High-tech advancements for the veterinary profession have merged opportunistically with favorable tax law changes.
If surgery is your game, this may be the year to ante up some cash and go shopping. High-tech advancements for the veterinary profession have merged opportunistically with favorable tax law changes. The 2003 federal tax act ("Jobs and Growth Tax Relief Reconciliation Act of 2003") provides significant business incentives for equipment purchases, including those by capital-intensive veterinary practices.
Any of the medical professions mandate continual reassessment of available equipment, competent personnel to use it, maintenance contracts and continuing education to optimize the investment's efficient use. Veterinary staff can easily recite wish lists for more efficient and better patient care through added equipment like new fluid pumps and pulse-oximeter units.
The most recent tax act provides for greatly accelerated expense deductions in the year of equipment purchase, through two significant rule changes. The first rule with which practice owners should be familiar is that of Section 179. Section 179 of the Internal Revenue Service Code provides an option for immediate deduction up to 100 percent of the amount spent on equipment purchases, even though the useful life expectancy of the equipment may be over several, if not many, tax years.
When investing in equipment, it is also important to dedicate time and money for training veterinarians and staff on the new tools to ensure a return on your investment.
Under prior law, the maximum Code Section 179 deduction was $24,000 in the years 2001 and 2002. For 2003, the new tax law changes the allowable amount to a full $100,000 for qualifying property placed in service beginning in 2003, 2004 and 2005.
For larger practices, the expensing allowance for major equipment purchases was previously phased out starting at $200,000 of equipment purchased in a single year. The phase-out has now been stepped up to begin at $400,000 of total qualified purchases. At $500,000 of purchases, Section 179 election is totally lost, but in such a practice the next rule is still available.
The second incentive to replace or purchase equipment comes in the form of bonus depreciation. After Sept. 11, 2001, a 30 percent bonus depreciation provision was enacted. Now, 50 percent bonus depreciation can be taken for new qualified property acquired after May 5, 2003, and before Jan. 1, 2005. For example, if a practice did not elect Section 179 on a $50,000 ultrasound, it could still enjoy a $25,000 bonus depreciation deduction, plus regular accelerated depreciation on the remaining $25,000 balance.
The combination of these two rule changes allows significant potential for immediate deduction of equipment acquisitions so that the maximum tax benefit can be accelerated to earlier years. Please note that although many rules and qualifications exist as to how these two rules work and interact, it is important for business owners to be aware that the next three-year span does provide a significant, and possibly once in a lifetime opportunity, to replace necessary but aged equipment with the very latest and most productive technology available. Combined with the lowest interest rates in 40 years, savvy practice owners will take a very close look at the current state of hospital equipment, as well as their needs for the midterm planning range of three to five years.
Tax incentives make it more appealing to buy equipment versus leasing. Low interest rates also make it more attractive to apply for a loan.
Prudent owners will plan tax strategy with their accountants, because of the complexity of the rules and the fact that state laws may be more stringent and restrictive than federal laws regarding bonus depreciation.
The primary place we see these deduction opportunities playing out in veterinary practice is in diagnostic modalities supporting the surgery suite. Computerized radiography, ultrasonography, CAT scan equipment and advanced imaging technologies are within the range of reality for many practices now. Bench chemistry and blood analysis equipment are also good revenue generators through pre- and post-surgical procedure monitoring.
Anesthesia equipment upgrades, such as vaporizers, oxygen delivery systems, and anesthetic gas evacuation equipment are other excellent choices for purchase or trade-in.
The progressive practice's shopping list will also include anesthetic monitoring equipment, advanced lighting for the surgery room, heated V-top surgery table units, intensive care recovery cages and similar equipment.
Keep in mind that all costs of equipment acquisition, including the labor for installation, are capitalized as part of the equipment's cost. These installation and acquisition costs are also advantageously captured as immediate deductions through Section 179 election and bonus depreciation.
Other costs of equipment acquisition should be computed in the calculation of your spending plan. Ultrasound machines are a great investment, and spin off much additional revenue through diagnostics and advanced procedures such as US-guided biopsies and associated lab work, as well as conclusion on surgical intervention potential. But, be forewarned; a profitable ultrasonography department also requires significant investment of time to develop the expertise to use the equipment. Dedication to continuing education and training out of the office, as well as in the practice, will be part of the total cost of acquisition and insuring the equipment does not sit unused in the corner.
Break-even analysis provides an exceptionally useful and powerful accounting tool in decision-making for equipment purchase and service pricing. Many equipment vendors provide simplistic break-even analyses, but these sales pitches are often incomplete at best and will not give a realistic appreciation of the time to recoup the investment made.
From a financial planning aspect, many other costs should be considered when performing a break-even analysis. The mixed list of potential fixed and variable costs follows:
Break-even analyses that include all of the above factors of new equipment acquisition and integration brightly spotlight the necessary fee structure to support costs of operations, as well as force a realistic assessment of the number of procedures per week required to meet targeted profitability. Even when it is clear equipment must be replaced or added, break-even analysis clarifies the necessary fee structure to support the investment.
With the new tax advantages, it is clear that equipment purchase as compared to lease is the most advantageous means for financing equipment acquisition. Although equipment leasing arrangements are a quick and expeditious method for a practice owner to gain access to a particular item of equipment, outright purchase of (acquiring immediate title to) the equipment has nearly always constituted the most favorable financing arrangement.
With low interest rates, arranging a bank loan or line of credit for equipment purchases would generally be the most advantageous stance for best price negotiation on the equipment you intend to eventually own. Sometimes rapid obsolescence of high-tech equipment, such as ultrasonography units, computer equipment and copy machines may tip the balance towards leasing. Realistically though, most owned equipment can be traded in when you foresee the need for upgrades, just as leased equipment can be. Talk with the vendor to assure you are aware of all options.
Current veterinary profession standards of care mandate you stay abreast of technologic changes. Client awareness and demand for advanced care is allowed through such equipment increases daily. The profession abounds with examples of client/animal owner willingness to subsidize the cost of these more advanced technologies and their appreciation of the value in them.
Investing in good equipment in advanced technology is an investment in yourself. Doctors of veterinary medicine are blessed with the capacity to apply skills and knowledge across a wide variety of specialties: orthopedics, soft tissue surgery, anesthesiology, intensive care and continual care support, imaging, geriatrics, pediatrics, and on and on. Quality, well-maintained and up-to-date equipment that supports these efforts makes practice fun, exciting and rewarding for a lifelong career.
Spend wisely, but do not fall behind through too much frugality. Better yet, invest time and interest in learning new technologies, purchasing the equipment to support your ever-expanding knowledge base and charge appropriate fees to reflect the value of all that you provide for superior animal health care.