That new piece of equipment is probably more expensive than you think.

Time for the fine print.

My last column intentionally simplified decision-making about buying new equipment: If the purchase allows you to provide better patient care in the context of a well thought-out business plan, do it. Now it’s time to consider the fine print that purchase entails.

YOUR PURCHASE’S OTHER REALITY

The shiny new instrument is placed in your office and you’re enjoying the added benefits to patient care and enhanced professional reputation. Your accountant, though, is looking at it through a different lens — how that purchase will impact “the books” down the line. Your corporation has now incurred a capital expense that needs to be depreciated and your state personal property return may increase, which impacts your state tax liability. In addition, a service contract on the equipment is likely necessary after the first year. Lastly, one must remember that all equipment has a limited lifespan, requiring it be replaced eventually. Managing these details with your accountant will ease financial obligations that eventually add up or catch up.

APPRECIATION OF THE DEPRECIATION

With your new OCT, you’re producing more images than you expected and managing cases better while facilitating patient education with colorful displays of pathology. The machine cost $70,000, and the revenue from the testing is easily paying off the monthly loan for it.

However, on the books, this line item is listed as a capital expense. If the purchase is financed through operating income, the corporation will incur taxes on any amount that is not depreciated. In this example, it is possible to have all $70,000 incur tax if there is no depreciation used. You need your accountant to figure out the best way to deduct this capital expense.

SLOW AND PAINFUL

Traditional deductions allow you to depreciate the equipment over the life of use — typically five to seven years. Again, if you purchase the equipment with operating income, you will be taxed on your tax return for the full amount of the purchase for that year and then you will qualify to deduct this cost in increments over the five or seven years.

Yes the government gets its money up front.

So while that $70,000 OCT machine is listed as a capital expense, the corporation must file its return that year paying tax on the full amount.

Say the equipment has a life span of seven years, you can depreciate the $70,000 over its lifespan period with more of the amount weighted in the first four years.

Thus, you pay tax on 100% of your purchase but can only write off 14% in the first year. It may hurt the first year, but the consolation is that you then have six more years of a depreciation deduction.

Several purchases later, this can impact personal distributions because they are tied up in tax payments. OM

Next time: Making use of Section 179

Scott LaBorwit, MD is a principal at Select Eye Care, with locations in Towson and Elkridge, Md., and is an assistant professor, part-time faculty, at Wilmer Eye Clinic of Johns Hopkins Hospital, Baltimore. His e-mail is Sel104@me.com. Disclosures: Dr. LaBorwit is a consultant to and speaker for Alcon.