Focus on Personal Finance
New Tax Law Helps Physicians
Higher depreciation allowances are retroactive to September 2001.

BY RICHARD J. ALPHONSO, JD, CPA/PFS, M.S.T., AND ANITA S. FRANK, CPA

Though you have already filed your 2001 medical practice tax return and your individual tax return -- unless you requested an extension of the filing deadline -- you may still benefit from a brand new business-friendly tax law by filing amended 2001 returns.

During the height of this year's income tax season, Congress passed a compromise economic stimulus package called the Job Creation and Worker Assistance Act that was signed into law in March. Many businesspeople are still unaware of its existence, much less its potential implications for you and your medical practice.

In this month's article, we'll discuss provisions of the Act that could give you a break on your 2001 through 2004 income tax liability. And you may still be entitled to a refund if you qualify and amend your 2001 return.

DEPRECIATION ALLOWANCE RAISED

As you may already know, when a tangible asset that has a useful life greater than 1 year is purchased for use in a business, the cost of the asset is expensed (and a deduction from taxable income is reported) as the asset is "used up" over a period of years. The IRS has rigid requirements for determining the useful life of an asset and the amount of depreciation expense that can be reported in each year of the asset's useful life. Here's a summary of the new special depreciation rule:

If you purchase, or enter into a contract to purchase, "qualified" property between Sept. 11 of last year and Sept. 11, 2004, you're now allowed an additional depreciation deduction equal to 30% of the cost of the asset. The asset must fall under the IRS category of property with a useful life of 20 years or less. This includes furniture and fixtures, most medical equipment, and computers, to name a few.

This deduction is only allowed in the first year that you use the asset, and the asset must be purchased new. Used assets don't qualify. For example, if you purchased medical equipment for $100,000 on Oct. 10, 2001, you can take $30,000 additonal depreciation. You can also depreciate the asset under the regular rules on your 2001 return. Your depreciable cost of the asset now becomes $70,000 ($100,000 less the $30,000 additional depreciation). The ordinary first-year depreciation on this $70,000 asset is $2,500. So, in 2001, you can expense $32,500 on this $100,000 asset through depreciation. Remember, qualified assets purchased in 2002 through Sept. 10, 2004 will also qualify for the 30% additional depreciation.

RENOVATIONS MAY QUALIFY

If you made physical improvements to your ophthalmology office under a lease after Sept. 10, 2001, the additional 30% depreciation allowance may also apply to those improvements. The rules are tricky here. The contract for the improvements must not have been in effect prior to Sept. 11, 2001, and there are also other requirements for leasehold improvements to qualify.

SAVINGS ON BUSINESS VEHICLES

For new vehicles purchased between Sept. 11, 2001 and Sept. 10, 2004 and used for business, you may be able to claim an extra $4,600 depreciation (multiplied by the percentage of business use) in the first year of use. The business use, or miles driven, must be more than 50% of the total use of the vehicle for the extra depreciation to apply.

To determine whether you or your practice qualifies for retroactive benefits, have your tax professional review your 2001 tax return. She can then amend the return if you qualify for any of the tax savings noted in this article.

Keep this new depreciation provision in mind as you plan for the growth of your practice through 2004. You have a rare opportunity to plan through the timing of asset acquisitions. Sharp planning can produce a favorable income tax outcome.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Anita S. Frank, CPA, are president and tax manager, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group {(713) 627-7660} provides personalized fee-only financial planning, investment management and business consulting services.