Veterinary equipment purchases and taxes: What you need to know
Christopher J. Allen, DVM, JD is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He can be reached via e-mail at email@example.com. Dr. Allen serves on dvm360 magazine's Editorial Advisory Board.
There is a great deal of truth in the saying “Timing is everything.” However, there isn’t always someone to tell you when you are facing a critical timing situation.
Many young doctors contact our office to find out how and where they can secure a new employment contract or position after leaving a bad work situation (for example, a hospital has cut salaries or a corporation has made undesirable management changes).
I’ve often found clients to be surprised by my advice. We may have an exchange about the validity and enforceability of their noncompete or nonsolicitation agreement, but the discussion often takes an unexpected turn toward the prospect of becoming a practice owner.
Conversations can vary depending on a client’s situation. A young, reasonably experienced client with good credit history is likely to do well in a critical timing situation. Rather than changing jobs because circumstances accelerated a decision that was likely to happen eventually, it may be time to consider practice ownership as the next career step.
Why timing in tax law is critical
When I graduated from law school, family farms were being sold at auction routinely because of confiscatory estate tax rules. For a time, there was virtually no estate tax at all. Now the taxation law has landed somewhere in between. (This does not provide much comfort to the farm families who went into bankruptcy.)
Similarly, situations regarding business and individual income taxes are constantly changing. That’s why practice owners need to remain vigilant to take advantage of the financial incentives provided under the Internal Revenue Code (IRC).
The wonder of depreciation
Depreciation is central to the real estate industry. We veterinarians can use it to our advantage, but we must carefully consider timing.
Depreciation is an accounting concept that is part truth and part fiction. Depreciation allows a taxpayer to deduct from taxable income an established portion of the value of something used in a trade or profession. The available deduction in a given year is calculated based upon the business property’s useful life and when that item is placed in service.
Those 2 terms are where the challenge lies. When an item is placed in service and how long it remains useful are characteristics we manipulate to our advantage—within the law—through judicious timing.
Internal Revenue Code Section 179
We have a friend in the Internal Revenue Code (IRC), which in some instances, keeps us from having to worry about useful life. Though it is not as powerful today as it once was, IRC Section 179 is designed to help businesses acquire and employ business property tax efficiently. However, Section 179 helps best when it is appropriately timed.
Section 179 allows a business to ignore the amount of time a piece of equipment or other physical items can be expected to last. Instead, the entire price of the equipment can be deducted (written off) from business income in a single year, regardless of its useful life.
Veterinary practices used to purchase a Mercedes or Land Rover for the clinic’s use and deduct the entire $50,000 from the practice owner’s taxes. Eventually, this practice was curtailed.
However, while Congress eliminated much of the luxury car use of Section 179, there were other, substantial expansions. Now, the Section 179 single-year depreciation regulations permit a single-year deduction of qualifying equipment of amounts approaching $1 million.
Why timing is critical
Effective use of the Section 179 rules requires close review by a practice owner or partnership, as well as a certified public accountant (CPA), to determine:
- What equipment is genuinely needed
- What other relevant tax matters will play into the use of the Section 179 code provisions
- When the equipment should be acquired
Let’s look at a couple of examples to help drive these points home.
- Practice A is an equine facility with several racetracks and breeders as clients. That hospital might want to accelerate or decelerate its invoicing so that one individual year sees $100,000 more in income than the previous or subsequent year. The single “high taxable income” year would be the best time to purchase that $100,000 ultrasound machine the practice wants. (The practice should ignore the ultrasound salesman’s tax advice and scrutinize any “buy-now” incentives that may pale by comparison with what Section 179 can do in terms of dollars saved.)
- Practice B has a partner who constantly tries to convince the others that the practice needs new diagnostic equipment. The partners look at last year’s tax return and don’t see net income sufficient for full use of Section 179 if the current year unfolds similarly. That practice needs to focus on increasing its efficiency and revenue, so that if they buy the equipment, there will be adequate profit against which they can make full use of Section 179. If that just isn’t possible, the timing for a large equipment purchase is wrong.
Beware of the vendors’ “offers and recommendations”
Section 179 is relatively straightforward, but has many nuances that need to be discussed with the clinic’s CPA prior to making any large equipment purchase.
Just as important is fully understanding the claims and offers made by salespeople. For example, a digital radiograph system may be purchased outright, leased, or purchased at a discount (with a 5- or 6-year minimum supply or product purchase commitment).
Don’t let a salesman pressure you into signing a contract before you can analyze the deal, giving consideration to how Section 179 could help to make price and other issues work in your favor.
Christopher J. Allen, DVM, JD, is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He can be reached via email at firstname.lastname@example.org. Allen serves on dvm360® magazine's Editorial Advisory Board.