Has your practice been considering the purchase of new nuclear imaging equipment?
If you haven’t looked into it already, now’s a great time to update yourself on Section 179 of the tax code and how it can help you.
The Tax Cuts and Jobs Act (2018) saw some of the most significant changes to the tax code in over 30 years. For medical practices that need to purchase new equipment, there is some incentive to do so. You may be able to deduct the cost of part or all of this equipment in your first year of purchase.
Here’s what you should know:
What is Section 179?
Section 179 was structured to encourage businesses to invest in equipment by allowing a deduction of up to the full purchase price for qualifying equipment. It is one of just a handful of incentives available to smaller businesses in an effort to bring economic stimulus.
Business owners have the choice of deducting all or part of the cost of the equipment from their gross income in the first tax year it was purchased. Among many categories (including company vehicles), the deduction applies to medical equipment or software, including nuclear medicine equipment. You can take the deduction whether you lease, or purchase the equipment outright.
Changes to Section 179 since the Tax Cuts and Jobs Act make a huge difference for smaller businesses. While previously, qualifying equipment was typically written off a little at a time through depreciation over five years, these new rules mean you can write it off all at once. This could make a huge difference if you happen to have a big year in revenue for the business too.
How does Section 179 work?
If your practice were to purchase or lease qualifying nuclear medicine equipment between January 1, 2020 and end of day December 31, 2020, you could apply the deduction if you meet the following criteria:
- Deduction limit: $1,040,000 (up from $1 million last year)
- Spending cap: $2,590,000 (up from $2.5 million last year). This means the maximum amount that can be spent on equipment before the Section 179 deduction is available to your company begins to be reduced on a dollar for dollar basis. You’ll note that this means the deduction cuts out at $3,630,000 in spending, so it truly is a small business incentive.
On top of those conditions, companies can take bonus depreciation for spending above the deduction cap at 100% for 2020. What does this look like in practice? Here’s an example:
- Cost of purchasing a new CT machine: $1.5 million
- First-year write-off: $1,040,000
- 100% bonus first-year depreciation: $460,000
- Normal first-year depreciation: $0
- Total first-year deduction: $1.5 million
- Cash savings (assuming 35% tax) $1.5 million x 35%: $525,000
- Equipment cost after tax: $975,000
If you look at this example, you can see that the deduction under Section 179 may even exceed the total loan or lease payments your practice needs to make on the new equipment for the year. For many practices, this makes a huge difference in terms of being able to pay staff salaries or purchase other needed equipment, for example. The official Section 179 site states:
“The obvious advantage to leasing or financing equipment and/or software and then taking the Section 179 Deduction is the fact that you can deduct the full amount of the equipment and/or software, without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction.”
Of course, you need to be aware of the deduction limits, especially if your practice might be in need of other new equipment or even vehicles. You also need to be aware that there is a tradeoff. Anything you deduct this year reduces your deduction for the next five years. If, for whatever reason you dispose of the equipment before five years is up after taking the full deduction upfront, the depreciation you deducted but never used will be added back to your income for that year. This is called “recovery” in the tax world and can be lengthy and complicated.
For most practices though, we would point out that nuclear imaging equipment is good for at least 10 years. Most practices will be safe to claim that 100% deduction upfront (but of course, we don’t give tax advice!).
The best place to start is by paying a visit to your tax accountant to run through some numbers and determine what makes sense for your practice.
Your next steps
If you’re thinking about making an investment in nuclear medicine equipment, the tax deduction aspect should just be part of the whole decision-making process. You will also want to make sure that the investment otherwise makes sense for your business. Consider:
- Why you’re making the investment. Is it simply to reduce tax burden?
- What your patient needs are. Is the equipment the best choice to meet their needs?
- Will the equipment investment open up new revenue streams for your practice?
- Will the equipment investment allow you to improve standards of care?
Explore the cost-benefit of investing in new nuclear medicine equipment and do so as soon as practicable. Tax planning is an important aspect of a successful medical practice and should always be dealt with as early as possible to ensure you’re maximizing your opportunities.
Digirad is here to help with any of your equipment purchase or lease inquiries. You can contact us here and ask for a free consultation.