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Lurking within the $787 billion American Recovery and Reinvestment Act are nearly $300 billion in potential tax breaks, and much of it is available to you.
Lurking within the $787 billion American Recovery and Reinvestment Act are nearly $300 billion in potential tax breaks, and much of it is available to you. Thanks to the stimulus package's more than $75 billion in business-related savings, every physician and every practice will benefit from a reduced tax bill in 2009 and 2010.
The provisions most interesting to physicians-the business-related tax breaks-include extensions of the available tax write-offs for adding new equipment to your practice. The Recovery Act extends so-called "bonus" depreciation, increases the Section 179 first-year write-off for newly acquired equipment, and adds two new "targeted" groups to those whose first-year wages are reduced, thanks to the work-opportunity tax credit. This article provides an overview of each of those provisions and how you may be able to take advantage of them.
For the 2009 tax year, you can write off and immediately deduct up to $250,000 of your practice's expenditures for newly acquired equipment. This means that you have the option of claiming the entire cost of a $250,000 piece of equipment as an expense deduction on the annual tax return, rather than smaller annual deductions over a number of years as the machine is depreciated.
The Recovery Act also extends (at least for another year) the 50 percent bonus depreciation allowed for new equipment and property with a recovery period of 10 years or longer. Unlike Code Section 179 (expensing that is available for new or used property), bonus depreciation is available only for new property or equipment.
At its most basic, bonus depreciation may be used to recover up to 50 percent of any amounts depreciated. Take, for example, equipment purchases for your practice: If the equipment acquired during the year costs $300,000, $250,000 of it will qualify for the immediate Section 179 write-off. The remaining $50,000 would be subject to depreciation and incrementally written off over the useful life of that equipment. With bonus depreciation, however, 50 percent of that remaining $50,000 could be treated as immediately deductible depreciation, with the rest ($25,000) deducted over the useful life of that equipment.
The regular dollar cap placed on vehicle write-offs has also been extended for bonus depreciation purposes. The cap for new vehicles used in or by a practice (or provided to the practice's principals) placed in service in 2009 is raised once again. This $8,000 increase mirrors the temporary 2008 cap increase, resulting in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.
Remember, however, as with any accelerated write-off, a large current depreciation deduction will result in smaller future deductions. There are two situations in which a taxpayer might consider opting out of this bonus depreciation for a tax year: 1) When the practice has net operating losses that are about to expire, or 2) it anticipates being in a higher tax bracket in future years.
Opting out of the bonus depreciation write-off is also possible for practices that have taken advantage of research and development expense writeoffs in the past. Last year, lawmakers temporarily allowed taxpayers to accelerate the recognition of a portion of their historic alternative minimum tax or R&D credits in lieu of bonus depreciation.
The amount that a physician or practice may accelerate is based on the amount invested in property that would otherwise qualify for bonus depreciation. This amount is capped at 6 percent of historic alternative minimum tax and R&D credits, or $30 million, whichever is less. The Recovery Act extends this temporary benefit through 2009.