By Rick Rubin, CPA, Bob Carreker, CPA and Elise Walker
It has been said that people who complain about taxes can be divided into two classes: men and women. Tax rates are often mentioned in these complaints, alongside new legislation and ever-changing rules. In a sense, tax complexity itself has become a kind of tax.
Understanding these complexities can be a daunting task, but taking the time to comprehend new tax rules can open the door to large tax savings for veterinarians and their practices. Accelerated depreciation, including IRS Code Section 179 and “Bonus depreciation” (Section 168k) are great examples of how a clear understanding of tax rules can be advantageous to a veterinary practice.
Section 179 was enacted in 1981 as a tax incentive for businesses to invest in capital assets and as a way to boost the economy. Section 179 allows taxpayers to deduct the full or fractional amount of the purchase price of certain qualifying business assets.
The extension of the American Taxpayer Relief Act in 2012 provided an excellent opportunity for veterinarians to invest in new and used veterinary equipment for their practices. The Section 179 depreciation deduction provides tax incentives for purchasing fixed assets. The 2012 extension enhanced the tax advantage from $250,000 in prior years and maintains the deduction limit of $500,000 through the 2013 tax year. Note, of course, that making these of the immediate write-off, the lease contract needs to be written in a way to qualify it as a capital lease. A capital lease transfers the benefits and risks of ownership to the lessee, which essentially makes the lessee the owner of the asset. A lease needs to meet at least one of the four following criteria to be considered a capital lease:
• Transfer of ownership: At the end of the lease’s term, ownership of the asset passes to the lessee.
• Bargain purchase option: At the end of the lease’s term, the lessee has an opportunity to buy the property at a significantly discounted rate than the fair market value of the property.
• Fair value: The present value of the lease payments should be at least 90 percent of the fair value of the property.
• Estimated economic life: The term of the lease should be greater than or equal to 75 percent of the economic life of the purchased property.
Capital leases in the veterinary industry are very common. They are written this way for a reason. Next time your client signs that lease for a hematology or ultrasound machine, you should remind him or her to check with their tax preparer for the potential tax savings.
The American Taxpayer Relief Act of 2012 provides great opportunities and incentives for veterinarians to invest in their practice for the 2013 tax year. By understanding bonus depreciation and Section 179, you can add value to your client’s businesses by reminding them of the tax deductions that can save them tax dollars. The $500,000 limit deduction is only set in stone through the end of 2013, leaving Section 179 deductions up in the air for future years. If your veterinary practice is in need of capital assets, now is the perfect time to invest and take advantage of the tax savings Section 179 has to offer.
One more caveat to consider: Not all states accept the same Section 179 deductions that the federal law permits. Some states have adjustments for the amount of Section 179 depreciation they allow. There are also differences for bonus depreciation as a number of states have decoupled their depreciation rules from the IRS. In other words, bonus depreciation may make sense for federal purposes, but not for state. We recommend consulting with a tax professional to determine if your state has differing rules.
Are your veterinary clients receiving all the tax benefits that they’re entitled to? Or are they missing out on valuable tax saving opportunities?
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