It’s important for medical practices to stay on the cutting edge of fast-moving technology if they want to stay competitive in today’s environment. This is especially true when you consider the financial incentives and reimbursements offered by the Affordable Care Act and the HITECH Act to healthcare providers that invest in health information technology and EHR.
In addition, valuable tax incentives that apply to the purchase or lease of qualifying medical equipment are available through December 31, 2013.
Accelerated Depreciation via Section 179 and Bonus Depreciation
The American Taxpayer Relief Act, which passed Congress early this year, includes provisions that allow practices that purchase or lease qualifying new or used medical equipment and place it in service in 2013 to depreciate up to $500,000 of the cost on their 2013 tax return. This tax break is known as IRS Section 179 depreciation. On January 1, 2014, however, the Section 179 depreciation amount drops to just $25,000.
In addition, practices may also qualify for bonus depreciation of an additional 50 percent on new (but not used) medical equipment purchased this year. To qualify for these accelerated depreciation tax breaks, the equipment must be purchased and placed in service between January 1 and December 31, 2013. So fast action is required to reap these valuable tax benefits.
Normal depreciation for most medical equipment is five years, but accelerated depreciation enables practices to depreciate more of the cost of equipment sooner, which can reduce the current tax bill. For example, if a practice bought $650,000 worth of equipment this year, it could depreciate and deduct $590,000 on its 2013 tax return: $500,000 + $75,000 in bonus depreciation + $15,000 in normal first-year depreciation. If the marginal tax rate is 36 percent, the tax savings would be $212,400, reducing the net first-year cost of the equipment to $437,600.
What Types of Equipment Qualify?
The definition of “business equipment” as it applies to Section 179 is quite broad — almost any type of equipment used in a practice qualifies, not just medical equipment. This includes tangible personal property, computers, office furniture and equipment, off-the-shelf software, and business vehicles. A few caveats to keep in mind:
- Off-the-shelf software is defined as software that is not custom-designed but is available to the general public.
- If equipment will be used for both business and personal use, the depreciation deduction is based on the percentage of time it is used for business purposes.
- Any vehicle used for business purposes qualifies, but there are total depreciation deduction limits on certain types of passenger vehicles. Other vehicle qualifications may apply — consult with your tax advisor for more details.
- Among the items that do not qualify for accelerated depreciation are land, buildings and permanent structures like parking areas, fences and HVAC equipment.
- Used equipment qualifies for Section 179 depreciation, but not bonus depreciation.
Also note that leased, as well as purchased, equipment qualifies for Section 179 depreciation, as does equipment that is financed. The cash flow benefit of leasing or financing equipment is that the full deduction can be claimed without paying the full amount of the purchase price this year. Non-tax capital leases (such as a lease-purchase) and Equipment Finance Agreements (EFAs) are two common leasing tools used to acquire medical equipment.
Tick Tock, Tick Tock…
Accelerated depreciation via Section 179 and bonus depreciation represent two potential tax-saving opportunities for practices that want to stay current with today’s cutting edge medical technology, but the clock is ticking. The Section 179 depreciation amount will drop to just $25,000 and bonus depreciation will go away completely at the stroke of midnight on December 31 of this year.
City National, as a matter of policy, does not give tax advice. You should consult with your own tax advisor respecting your unique tax situation.