You’ve probably been getting emails and phone calls telling you to take advantage of “Section 179”. And while you might have a general idea that buying equipment can save you on your taxes, you should probably have a more specific understanding of what that means so you can make an informed decision. With that in mind, this article will help to guide you through:
- Understanding the Tax Code
- Assessing your 2020 needs
- Exploring your options
While most of the articles in our Knowledge Center have focused on the clinical needs of your practice, there are also the financial needs, and equipment can have an immediate impact on both. Beyond the ability to expand your standard level of care, competitive advantage, and reputation as a state-of-the-art facility, equipment purchases can provide a serious tax advantage.
What are the tax implications of purchasing “this year”?
Your accountant certainly knows about Section 179 of the IRS tax code, but you may be less familiar and if you didn’t consult with your accountant before, you need to before you pull the trigger.
IRS Section 179 External References
The websites above do a much more thorough job of explaining how Section 179 works, but in a nutshell…
When you buy capital equipment, you are allowed to (and probably do already) depreciate a portion of its full value, usually as a percentage per year over several years. But if you choose, Section 179 of the IRS tax code allows businesses to deduct the FULL PURCHASE PRICE of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or finance) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
The Section 179 deduction for 2020 is $1,040,000. This means U.S. companies can deduct the full price of qualified equipment purchases, up to $1,040,000, with a “total equipment purchase” limit of $2,590,000. The deduction includes both new and used qualified equipment.
This is article is not written by or sanctioned by a tax accounting firm, so you need to consult your tax or accounting professional for advice on the correct application and use of Section 179 of the US tax code. But these are non-trivial tax savings that should absolutely be a part of your equipment purchasing plan. Find out what your tax situation is (before April of next year when you actually file) so you can make the most impact this year.
How impactful will this deduction be for you this year?
This year has been seriously challenging from a public health and economic perspective. By-and-large though, the veterinary industry has been one of the stable pillars, and we are all fortunate to be a part of this community. And while there has been (and continues to be) a lot of uncertainty in the economy, if you take a close look at your year-to-date revenue and earnings, you may be surprised to find that 2020 was more profitable than you thought.
The benefit to you is that if you’ve had a “pretty good year” from a revenue standpoint, and you want to offset some of those profits, you can get a rather large Section 179 deduction on your equipment purchase.
If you purchase a $50,000 piece of equipment in 2020**, and are in the 35% tax bracket, then you can depreciate that entire piece of equipment in 2020 so that your tax deduction is $17,500. Those are tax dollars you just saved yourself.
** The caveat is that you must pay for, take ownership, and put it into use (have it installed) in the calendar year in which you take the deduction. So if you sign a quote for equipment on December 30th 2020, but your order doesn’t get processed and your equipment doesn’t get shipped until mid-January, you can’t claim the deduction for 2020…it will have to be for 2021.
If this year wasn’t your best, and so you don’t need the tax offset, you can depreciate a smaller percentage (or none) this year and save that depreciation for years when you need the tax break.
Do you need to pay “in cash” to realize the tax benefit?
If you want the points/miles, then by all means “put it on the gold card”. But you have other options. If this purchase incorporates a new modality for your practice, then you may want some flexibility in the early months to give yourself time to build up your marketing and your staff’s buy-in. In today’s “climate” you may also have some uncertainties about caseload and business logistics and state-wide policy timelines.
Financing options come through professional lending services, like banks and leasing companies. You will find that there are many options, both leases and loans (for some explanations on the differences, here are two articles you may find useful: https://www.smarterfinanceusa.com/equipment-loan-vs-lease and https://www.fundera.com/blog/difference-between-equipment-leasing-and-equipment-loans). They each have advantages in interest rates, payment amounts, pre-payment penalties, date of ownership, tax deductibility of interest payments, and so on.
You’ll hear a lot of “buy now, pay later” phrases being used because there are some 90-day to 6-month deferred payment plans that make incorporating new equipment much less stressful so that you concentrate on the important aspects of building your practice. Combining this with the tax benefit, Peggy Nielsen of OnePlace Capital says, is a win-win:
“The taxes you save with the deduction will almost always exceed your cash outlay for the year when you combine (i) a properly structured Equipment Finance Agreement with (ii) a full Section 179 deduction. It is a bottom-line enhancing tool that allows you to add new equipment, vehicles, and/or software to your business.”
For more information on some popular veterinary equipment financing options from OnePlace visit this link: https://soundvet.oneplacecapital.com and to enter your own numbers on their Section 179 calculator, click here: https://www.oneplacecapital.com/section-179-calculator.php
Lisa Gabrielson from TIAA Bank also emphasizes….
“As we enter the last few months of the year, now is a great time to take full advantage of our deferred payment structure and maximize the 2020 Section 179 tax benefit, which may allow you to write off the full cost of the equipment placed in service on or before December 31, 2020.”
Take Home Message
It is essential that you NOT wait until April 15th to understand what kind of 2020 you’ve had from a dollars-and-cents perspective. The sooner you understand the level of profitability you’ve had and the tax liability you will face, the better equipped you will be to make a year-end decision. Capital equipment purchases remain one of the best ways to invest in clinic, and our tax code emphasizes that by extending these Section 179 benefits. Take advantage.