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Practices get bigger tax break for equipment purchases

The new law also could make it less expensive to sell a practice or medical assets.

By Katherine Vogt, amednews staff. June 23, 2003.

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If you've held out on buying new computers, medical equipment or office furniture for your practice, your patience has been rewarded.

The new tax cuts signed into law last month include greater off-the-top deductions and depreciation for some capital purchases. For example, a practice that last year could, in a best-case scenario, write off $80,000 of a new $150,000 practice management system purchase could now deduct $130,000 -- a $50,000 difference.

Physicians also could benefit from cuts in income tax rates as well as a cap on the tax rate for dividend income and deductions in the capital gains tax. Not only could a capital gains cut benefit physicians who cash out investments, but accountants say it's also a boon for doctors who sell their practice.

There are caveats. For example, a practice posting a loss would not be eligible for all equipment deductions, and a practice's corporate structure would determine what deductions it would get. But with rising liability insurance premiums, threatened Medicare and Medicaid reimbursement cuts and continued pressure from managed care, the cuts are welcome relief to some physicians.

"At all levels I believe that the tax law changes give us all a certain additional level of comfort that we can spend some money on things that we would have been putting off spending some money on in the past," said Michael Fidler, MD, an orthopedic surgeon in Charleston, W.Va.

Those words would be music to the ears of President Bush, who pushed what would become an estimated $350 billion tax cut program in hopes that it would heat up the economy, particularly through business investment.

But some physicians aren't so sure of the plan, having in their eyes seen little change in investment patterns after the first Bush tax cut in 2001.

"I was totally unimpressed that the first tax rebate that we got served any purpose at all," said F. Tempel Riekhof, MD, a retired ophthalmologist from Salt Lake City. He fears the cut's effect on the federal budget deficit.

Because the latest tax cut has been in effect for such a short time, no one has noticed any change in physician investment patterns. But incentives to change are available, experts said.

"It's at a time when medical practices have been hit hard. It will help the industry because of the huge push to spend money on new revenue sources, which usually require equipment, and because of the huge push to computerize practices," said Anna Sudduth Fink, a certified public accountant and health care consultant in Baltimore.

The most significant change expected to help medical practices is a new rule altering the expensing deduction allowed for equipment and computer purchases up to $400,000. Under the old law, the so-called Section 179 rule allowed a one-time deduction of $25,000 in the first year assets were purchased. The new law allows for a $100,000 deduction.

An increase in the so-called bonus depreciation deduction will let medical practices deduct even more of the value of those assets on a faster scale than before. The deduction is used for assets with long-term value that depreciate over time, like computers. Under the new law, 50% of the assets' value can be deducted right off the top. The remaining value is deducted on a sliding scale over three, five or seven years, depending on the asset -- for example, computers would be on the five-year scale. Formerly, the initial deduction allowable was just 30%.

Financial experts say the new rules provide strong incentives for doctors to invest in their practices by giving them more deductions in the first year that the assets were purchased.

"You're better off with a tax deduction today than you are five years from now. If you get the $20,000 today, instead of five years from now, the theory is you can take that money and get more out it," said Philip Goldfarb, a certified public accountant in Hicksville, N.Y.

Experts say doctors may want to contact a tax adviser to see if their practices are structured in the best way to take advantage of the new law.

For example, Dr. Fidler's six-physician practice hoped the small business incentives could enable it to spend $200,000 to modernize a practice management system. But because his practice is set up as a personal service corporation, which zeroes out income at the end of the year, it won't likely qualify for the tax breaks.

"Were we able to take part, these [new tax rules] would be extremely important drivers about the decision of when and how much to invest," Dr. Fidler said. "It's just an accident of the type of legal practice organization that we are in now that has prevented us from taking advantage of an otherwise very valuable revision of the tax laws for medical practices."

Personal income and capital gains

Still, Dr. Fidler expects to get relief on a personal level, and, indeed, doctors generally will. The new law changes income tax rates, with the top bracket dropping from 38.6% to 35%. Brackets in the middle had rates drop two percentage points to 33%, 28% and 25%, while the lowest rates -- 10% and 15% -- were unchanged.

Robert Caplan, a certified public accountant from Foster City, Calif., said the resulting changes in tax withholding by employers should be made by midsummer. If a physician is an employer, then he or she should follow the new tax withholding tables as of July 1. For self-employed doctors' own withholding, Goldfarb recommends following the same estimates for quarterly withholding, though it may produce a refund at year's end.

"If nothing else, the reduction in income tax rates is very significant. These are the biggest one-year bracket changes since Reagan was president," Caplan said.

Doctors with financial investments may benefit from changes to the rules on capital gains and dividends. The maximum net long-term capital gains tax fell from 20% to 15%, while the rate on capital gains for lower-income taxpayers fell from 10% to 5%. And qualified dividend income will now be taxed at a maximum rate of 15% instead of at the income tax rate.

Kevin Feeley, a Chicago-based tax attorney, said the changes "will reduce the tax burden on selling a practice or pulling capital gains or dividends out of practice. It will also increase the flexibility of the sale of medical practice assets."

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