Avoid Mental Taxation: Plan Ahead On Major Purchases

With the likelihood of fewer eligible tax write-offs, being aware before making big purchases is important.

While current tax law allows for healthy deductions on purchases and bonus depreciation, accountants say making a purchase solely for a tax writeoff is not a good idea. However, if a purchase is inevitable, this year is the time for it as ever-changing tax laws may mean fewer write-offs starting in 2012.

“The benefit that awaits a veterinarian is not the tax savings on the purchase of capital equipment, although that is a great perk for consummating the transaction,” says Mark McGaunn, CPA/PFS, CFP, a managing member of McGaunn and Schwadron CPAs LLC, in Needham Heights, Mass.

“The benefits to be gained are the potential additional revenues to be generated, the additional skills and responsibilities that doctors and other staff can learn, making each more valuable, and ultimately the increased level of care that can be rendered to a patient base wanting or needing the additional dynamic the purchase will bring to the veterinary practice.

“I always like to be cognizant of the financial rewards that follow large capital investments in a practice, but it’s the intangible and hard-to-measure soft rewards that may yield greater dividends. Waiting to make the purchase may delay these potential dividends.”

After a practitioner gets the green light from her CPA, delaying the purchase until the end of the calendar year could also mean missed referrals, new clients and revenue.

“Most vets make equipment decisions based on income stream,” says Gary Glassman, CPA, of Burzenski & Company in East Haven, Conn. “The motivation has been to wait until the end of the year to see use for a tax write-off and calculate practice sales for the year.

“Manufacturers know vets do this and the last quarter tends to be the most productive for them. But since most veterinarians don’t pay cash—they either lease or take out a loan for a major purchase—there’s no reason to wait.”

Glassman says when making a purchase that requires payments, three major factors need to be considered.

Check-Off List

“First, configure how the purchase will improve the practice,” Glassman says. “Will it make the practice more efficient? Is it state-of-the-art technology and what’s the return on investment, or ROI? Lastly, think about taxes. Consider if the deduction will alter your tax bracket. It’s a stigma to question if a veterinarian can afford a piece of equipment. When you look at a purchase as a profit center, you don’t have to think of it as an expense. The tax break is a given; the profit aspect of a purchase isn’t.”

CPAs suggest formulating an annual capital budget with a practice consultant. Based on cash and projections, a capital budget provides a solid idea of what veterinarians can afford.

“We suggest meeting on a quarterly basis with advisors,” says Terence O’Neil, CPA, CVA, a partner at Katz, Sappert and Miller CPAs in Indianapolis. “Meeting with advisors quarterly allows a vet to discuss tax law and stimulus changes and stay abreast of what’s going on. An accountant can’t help you plan for taxes if you consult with him in March for April filing.”

If a purchase can result in a practice profit, the question isn’t whether the purchase should be made. It’s which company to buy from.

“Consult with other veterinarians, know the terms of the agreement with the company—such as customer service policies, warranty, technology updates, cost of education and ways the education is obtained—before signing anything,” O’Neil says.

“You’ll have to live with these terms for the life of the equipment, so make sure they’re agreeable, and don’t skip the step of speaking with at least three companies directly about their product features, prices and services.”

O’Neil says veterinarians experiencing flat or decreased revenue growth are hesitant to make further unnecessary investments at this time. Planning wisely, however, allows practitioners to make purchases that can increase revenue.

“We tell clients that the best time to invest, whether in people, equipment or facilities, is in a down economy,” McGaunn says. “Although there are indications in our veterinary practice clients across the board that there is some improvement in revenues over 2008/2009, some clients have found it seems pet owners have permanently downsized their veterinary expenditure budgets.

“This could be a consequence of pet owners not knowing the true cost of providing veterinary care. But to provide cutting-edge medical care and/or to be positioned for the time when the economy begins rolling to levels of five years ago, veterinary practices may need to invest just to compete with the status quo for area practices.”

Calculate ROI

“It’s important to do a payback-period analysis,” says Karen Felsted, CPA, MS, DVM, CVPM, CEO of the National Commission on Veterinary Economic Issues in Schaumburg, Ill. “This will tell you how long it will take to break even on the purchase.

“Factor in the cost of the equipment, sales tax, delivery, installation, training, loan interest and ongoing expenses—for example, ultrasound gel if you’re buying ultrasound equipment. Estimate how many times a week, then a year, it can be used. Subtract operating costs from the annual income generated.

“If you’re buying a piece of equipment that may need to be updated in five years and it will take five years to pay it off and begin making a profit, then what was the point of the purchase? I suspect many veterinarians do not do the payback analysis.”

Although many manufacturers and other industry providers say they help veterinarians calculate ROI, advisors warn that some are interested only in getting their products in as many practices as possible. Meeting with a third party can provide a more accurate projection. When considering a write-off purchase, consider your tax rates. Felsted reminds veterinarians that if their tax rate is 33 percent this year and will be 20 percent next year, they should write it off in the year they are more heavily taxed.

“Mental preparation is also a factor for when veterinarians make a purchase,” says Tom McFerson, CPA, ABV, Gatto McFerson CPAs, Santa Monica, Calif. “When thinking about making a purchase at a veterinary conference, it’s kind of like buying a car. There are times you’re just looking around in car lots and there are times you go to make a purchase. Resist impulse buying, and plan accordingly.”

McFerson says almost every practice experiences a decreased client flow during the year and advises clients to consider making a purchase that requires extensive training during these slow times.

“Tax law requires the purchased item to be installed and in use prior to writing it off on taxes,” McFerson says. “Waiting until December to make a purchase means a risk of not having training and not meeting tax requirements, which means rolling into the following year. If you’re buying new software, training can be lengthy and would be best performed when the client flow is lower.”

Tax Law

The 2010 Tax Relief Act that was signed on Dec. 17 benefits veterinary practices by increasing 50-percent bonus depreciation to 100-percent for qualified investments made after Sept. 8, 2010, and before Jan. 1, 2012. Bonus depreciation, unlike IRC Sec. 179 expensing, is not limited or capped at a certain dollar threshold.

“Only new property qualifies for the 100-percent bonus depreciation unlike IRC Section 179 depreciation expensing, which can be claimed for both new and used property,” McGaunn says. “Although enhanced 100-percent bonus depreciation is not extended into 2012, the new law does provide 50-percent bonus depreciation for qualified property placed in service after Dec. 31, 2011, and before Jan. 1, 2013.”

For tax year 2011, the 2010 Small Business Jobs Act increased the IRC Sec. 179 expensing dollar and investment limits to $500,000 and $2 million.

“For tax years beginning in 2012, the new law provides for a $125,000 limit and a $500,000 investment limit,” McGaunn says. “Amounts that are not eligible for expensing due to excess investments cannot be carried forward and expensed in a later year; they may only be recovered through depreciation. So the purchase of $800,000 in purchases categorized as five-year property or generic equipment in July 2011 can be fully expensed under bonus depreciation rules.”

McGaunn says if a veterinarian were building a new facility or funding leasehold improvements and had a cost segregation engineering study done, some of the costs related to land improvements, plumbing, electrical and other systems are assigned shorter life spans than the 39-year property building costs typically fall under. They would then qualify for bonus depreciation, an immediate write-off, rather than waiting 39 years to recapture those dollars spent as a deduction.

“A veterinary client who built a hospital in 2010 was able to deduct an additional $251,000 in bonus depreciation as a result of having a cost segregation engineering study done,” McGaunn says. “Proper planning has its rewards.”

Considering challenges the current economy presents isn’t necessarily a negative, advisors say. A practice can still grow with efficiency and proper planning.  

“It’s a big assumption that the economy will any time soon return to the state it was in 2005 through early 2007,” Felsted says. “It’s a new world for vets and they will have to work harder from now on and keep concerned about finances. A financial mistake was more forgiving in years past than it is now.”

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