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FINANCIAL FACTOR

Make use of section 179

Part two of “Count the (hidden) cost.”

In my July column, we discussed one of the financial impacts of a new technology purchase, namely, depreciation (See https://tinyurl.com/ybsns7ht ). This month, let’s discuss another possible financial motivator: section 179 of the IRS tax code. Passed by Congress, along with other stimulus measures in 2010 in response to the turbulence in the U.S. economy, section 179 allows a business to deduct up to $500,000 for equipment purchased in 2017 as long as it meets certain requirements. This deduction must be put into use by Jan. 31, 2017.

With a section 179 deduction, the entire amount of the capital expense to the corporation can be deducted with no tax liability. This has a powerful impact on your practice’s economics. If your loan extends seven years, though you haven’t paid the purchase price yet, you get to write off this amount for taxes — thus offsetting profits and reducing your tax liability by this full amount. A considerable tax savings for you upfront! Understanding the impact of depreciation may affect when or how you decide to purchase equipment.

EVERYONE WANTS A BITE

Once the equipment is in the office, it becomes the company’s personal property. Your state or county may tax you on the personal property each year. Where I live, there is a 2.5% annual tax on the assessed value of personal property. The assessed value goes down 20% per year on this type of equipment to a floor of 25% of cost until the equipment is disposed of. A $70,000 piece of equipment now has a tax due in the first year of $1,575 for my county.

Another expense: After the first year the manufacturer will likely offer a service contract for the equipment. These contracts can range from $500 to $2,000 each year for a $70,000 piece of equipment, depending on the technology, level of service, and so on. Incentives to buy the service contract often include quicker service and loaner equipment to avoid downtime.

Although this insurance-like policy is tempting, it quickly adds cost.

I often purchase service contracts for things like lasers but “roll the dice” for less mission-critical equipment. I pay more for service when these things break, but overall I’m still ahead … so far.

THE PEANUTS’ TEACHER IS TALKING

When your accountant mentions capital expenses, tax liability, depreciation or section 179 deductions, don’t space out and just hear what Peanuts’ Charlie Brown hears when his teacher is talking … “Wah wah wah.” Understand these terms, how equipment purchases are placed “on your books” and watch the impact they have on your taxes. While I still believe that you should purchase equipment based on providing improved patient care, these fine-print details help fill out the big picture as you enhance your practice. OM

Disclaimer: This column is not intended as tax advice; individuals should consult an accountant.