Plan to take advantage of tax write-offs

Practice Pointers. By Cathy B. Goldsticker, AMNews contributor. Aug. 18, 2003.

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Question We plan to add medical equipment to our practice. We will compare the economics of purchasing and leasing, but are there income tax issues to consider as well?

Answer Before the 2002 and 2003 tax law changes, equipment operating leases, where ownership remains with the lessor, would usually result in a faster write-off of major capital equipment payments.

Now the tax write-offs (depreciation allowance) for purchased equipment are so generous that usually a purchasing arrangement will result in the faster write-off. Here's why:

First, $100,000 per year of your capital equipment purchases can be written off immediately -- that's often referred to by its formal IRS title, Section 179. Next, the first-year bonus depreciation is equal to 50% of the original purchase cost after deducting the $100,000 write-off. Finally, normal depreciation also is allowable in the first year and is computed on the cost basis after reductions for the Section 179 write-off and the first-year bonus depreciation. It is usually based on a five-year accelerated write-off period.

However, there are situations when some of these write-offs may not be allowed. For example, if your practice reports a tax loss for the year or acquires more than $500,000 in equipment and furniture, you may not use Section 179. Proper planning can keep these limitations out of your way.

For example, if you can avoid a loss by paying less in physician taxable bonuses, or spread your purchases over two years to avoid the $500,000 limitation, Section 179 still will be available. If Section 179 cannot be used, then the first-year bonus depreciation will be higher and will substitute for some of the lost tax write-off.