Taking Advantage of the IRS Section 179 Write-Off
Written by Brad Beck, Vice President Bank of America Practice Solutions
What did you think the chances were that a banker would not start anything that is printed on paper without a disclaimer? Well if you took the safe bet you were right and here it is: I am not a CPA and therefore not certified to give tax advice. What you will read in this article are my thoughts based upon my experience in the equipment and practice finance industry. Any decisions you make about equipment purchase, and the tax benefits associated with those purchases, should be made only after careful consideration with your tax advisors. With that disclaimer out of the way, let me proceed with some information that may be helpful for you.
State-of-the-art technology and equipment has become more important than ever in a modern, competitive Health Care Office, whether you are a Dentist, Veterinarian, Optometrist, M.D., etc. The cost of technology has increased, and continues to increase, in the economic environment in which we live. Purchasing equipment is a difficult decision for many reasons but, somewhat fortunately, the government has decided to make the decision making process a little easier by giving large incentives to encourage purchases over the next few years. These incentives also help on many levels to stimulate the economy. Unlike most complicated tax legislation we see, in this case the government has gone out of their way to make the tax benefits to purchasing equipment very easy to understand.
Let’s clarify the language first. What is IRS Section 179? This refers to a small business tax incentive bill that Congress passed this year that allows small business owners a significant tax break on purchases of equipment. A taxpayer can elect to expense up to $125,000 in equipment purchases in 2007. This legislation, passed on May 24, 2007 is retroactive to purchases made since January 1st of this year. This is up from $112,000 that was previously set for this year and up from the $25,000 that it was previous to that! So this is a significant change in a tax advantage. The equipment must be used in the active conduct of a trade or business, which is just a fancy way of saying you must use the purchase in your practice. (A boat may be a valid tax deductible purchase for a fisherman but not for a Dentist!).
The dollar amount allowable to expense from Section 179 changes yearly according to inflation. The equipment purchase becomes a direct savings on your taxes due based upon your marginal tax rate. Any purchase amount that exceeds the 179 deduction amount of $125,000 for 2007 will go to normal depreciation schedules. That may sound complicated, but it is actually very simple. Below are two real world examples of the math which should explain it better.
I hope the above real world examples give you a grasp of the concept of the Section 179 tax benefits. If equipment purchases are in your near future, and you have not already used your “179″ benefit this year, you should give thought to purchasing and installing the equipment before the end of the year.
Before you all run to your sales reps and place equipment orders, there are a few points and limitations you should be aware of:
* This tax benefit is available from January 1, 2007 through December 31, 2010.
* As noted above, the “179″ write off is limited to $125,000 yearly (adjusted to inflation yearly).
* There is a phase out provision for 2007: If you purchase over $500,000 worth of equipment there is a dollar for dollar reduction of the $125,000 write off. As an example, if a Doctor purchases $550,000 worth of equipment, $50,000 of the $125,000 potential write-off would be lost and only $75,000 would be able to be directly written off and the rest would be depreciated as normal. Or, as another example, if a doctor purchases $625,000 in business assets this year, the Section 179 is completely phased out and there is no benefit.
* The practice must have taxable income to qualify and be used, but any write off not able to be used can be carried over and used in the following year.
* Business asset purchases (equipment) must be “Placed into Service”
In order for an equipment purchase to qualify as “Placed in Service”, the equipment must be delivered and installed and ready to perform its function. It must be available and capable to perform its function. It does NOT have to be paid for in full. The purchaser must be obligated to pay, which means they must have executed a contract to pay, or created a liability (loan) to pay, or actually paid for it.
This tax deduction will be in effect through 2010, so you should be planning accordingly. What happens January 1st, 2011? Section 179 reverts back to $25,000 and the phase out starts after $200,000. So at $225,000 in equipment purchases there will no benefit to the Section 179 write off. Using one of the examples above, a $300,000 equipment purchase in 2007 will give a savings of $56,000 (with a 35% tax rate), but that same $300,000 purchased in 2011 gives a savings of only $28,000. That’s a difference of $28,000. I’m sure you all can think of something to do with $28,000 other than give it to Uncle Sam (maybe that boat that the fisherman was able to write off under Section 179!).
Now as I say to my two sons, you have to make your own decisions in life and in business. In the end, if you have no need for new equipment this year, then this information may be irrelevant right now. But, if you do have a need for new equipment and don’t take advantage of this, you could be wasting money. The world will not stop turning but, like I said, we all have things we can do with some extra tax savings.
I hope this information is helpful and gives you some food for thought that you should discuss with your CPA.
Brad Beck Vice President Bank of America Practice Solutions