Jeff Jackson for MD News writes: Your practice doesn’t have to settle for depreciating equipment over several years. With the Section 179 deduction, you can generally elect to deduct machinery and equipment in the first year the equipment is placed in service. Due to the extension of Section 179 under the American Taxpayer Relief Act of 2012, you can basically write off 100 percent of the equipment and software your business needs. The maximum Section 179 allowance for 2013 (and 2012) is $500,000.
For many medical practices, this is one of the best tax breaks available today, yet many fail to take full advantage of it. Let’s say you spend $150,000 on equipment this year. What are your options regarding taking deductions?
With the Section 179 election, you can write off the entire $150,000 this year, rather than depreciating it over several years. This includes medical equipment, machines, computers, copiers, fax machines, telephone systems and office furniture. Without electing Section 179, money spent to purchase business equipment is treated as a capital expense and will have to be recovered over a period of years through depreciation.
Did you know that your company can lease equipment and still take full advantage of the Section 179 deduction? In fact, leasing equipment and/or software with the deduction in mind is a preferred financial strategy for many businesses, as it can help with bottom-line profits and cash flow. The obvious advantage to leasing or financing equipment and/or software and then taking the Section 179 deduction is the fact that you can elect to deduct the full amount of the equipment and/or software without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction.
Section 179 limits for the year 2013 were increased by the American Taxpayer Relief Act, which allows businesses to write off up to $500,000 of qualified capital expenditures, subject to a dollar-for-dollar phase-out once these expenditures exceed $2,000,000 in the 2013 tax year.
To get the deduction for tax year 2013, you have to place the equipment in service this year, as once the clock strikes midnight on Dec. 31, 2013, Section 179 can’t decrease your 2013 taxable income.
In order to qualify for the tax break, you must use the equipment more than 50 percent of the time for business. If you use it for personal purposes, you must maintain records, as you can only write off the business-related percentage. In addition, the amount you write off for Section 179 can’t exceed the taxable income from your business. That may be a problem for C corporations if the business zeroes out its income by paying everything in salaries, because there won’t be enough income to cover the Section 179 election.
It might be better if the corporation pays less compensation and keeps enough taxable income to cover a Section 179 election. You can also carry over any excess to future years if you run up against the income limitation.
If your C corporation operates at a loss this year but expects to turn a profit next year, you might still be better off making the Section 179 election this year and carrying it forward, rather than depreciating equipment purchased this year over several years. As long as you “place it in service” by Dec. 31, you can deduct the equipment with Section 179.
With some careful timing, you can fully utilize the tax break this year. Look around your practice toward year-end, and buy any equipment you need.
Many physicians are involved in more than one venture and often involve differing ownership of the ventures. In the case of pass-through entities (partnerships, LLCs and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Consult your tax advisor for details.
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