Equipment Tax Break Set to Expire
To take advantage of 50% bonus depreciation, you must act soon.
BY RAYMOND DOHERTY

The 50% bonus depreciation is set to expire on Dec. 31, 2004. If you want the chance to maximize your tax benefits, and you are planning to upgrade or purchase new equipment as well as off-the-shelf software, now is the time to act.

The 50% bonus depreciation, created by Congress in 2003 as a short-term incentive to stimulate spending, allows you to claim a bonus depreciation allowance equal to 50% of the adjusted basis of the qualified equipment. In effect, it allows you to accelerate tax deductions into the first year when you purchase and install equipment and software for your business.

This deduction can equate to significant tax benefits while allowing you to make major capital investments that can improve overall services to your patients. With all of the current deductions, an ophthalmologist in the 35% tax bracket could realize $56,280 in tax benefits in 2004 on $200,000 in eligible equipment and software investments. Next year, without the 50% bonus depreciation, the benefits will be just $42,560.

Time Is Money

From paperless patient files to practice management software to surgical equipment, creating a state-of-the-art practice requires investments in information technology systems as well as laser systems and digital equipment.

You understand the benefits for your patients and your practice efficiency of owning such equipment, but don't overlook the tax and cash flow benefits that you can gain, especially if you choose to finance the equipment purchases over 5 to 7 years. By spreading out payments rather than paying cash upfront and maximizing tax deductions, you could boost your cash flow as the new equipment generates more income and/or greater efficiencies for the practice. In essence, the equipment could end up paying for itself and perhaps more.

The more you buy, the more you can deduct. That's because Section 179 of the tax code currently allows buyers to claim an immediate deduction for up to $102,000 worth of new equipment. By combining Section 179 and the 50% bonus depreciation allowance, the tax benefits are maximized. For example, if you purchase $150,000 in equipment, you can deduct $102,000 of the cost based on Section 179, leaving $48,000. With the 50% bonus deprecation allowance, you can then deduct another $24,000. The remaining $24,000 in equipment cost can be depreciated over 3, 5 or 7 years, depending on the equipment.

To qualify for the 50% bonus deduction, the equipment must be acquired after May 5, 2003 and placed into service before Jan. 1, 2005. However, the purchase won't qualify if there was a binding, written contract to acquire the property that was in effect before May 5, 2003.

As is always the case with tax deductions, these are not automatic. You must elect to take them. Also, these benefits only apply to purchases and financed purchases; lease agreements are not eligible.

For any ophthalmologist considering a major capital investment, the tax benefits now may be too good to pass up. With pressure building in Washington and elsewhere for electronic medical records, and patients expecting to see the latest technology in their doctor's office, creating a state-of-the-art facility while taking advantage of the closing window to maximize tax benefits could be a smart move.

Raymond Doherty is senior vice president of GE-HPSC, part of GE Healthcare Financial Services, a financing firm for medical and dental practices.