Economic Stimulus Act Offers Big Tax Breaks for Health Care Providers
Rebate checks for consumers may have grabbed the headlines, but the recently enacted economic stimulus package provides an even more important benefit for business owners, including health care providers.
The Economic Stimulus Act of 2008 (the Act) provides business owners with significant tax deductions for the acquisition and use of certain capital assets in 2008. Health care providers can use those deductions to get big discounts on medical equipment and devices, computers, furniture and other office equipment. The tax savings created by the deductions create a strong incentive for health care providers to upgrade their practice or even start a new venture this year.
The Act made significant, although temporary, changes to the Internal Revenue Code. President George W. Bush signed the Act earlier this year with the hope of giving the economy a much-needed boost. The most publicized provision of the Act provides for rebate checks for individual tax payers in order to increase consumer spending.
Of course, increased consumer spending may translate into revenue for businesses, including health care providers. But the other lesser touted provisions of the Act may provide a much bigger bonus to business owners. The Act is designed to provide business owners with tax incentives to invest in their own businesses by acquiring and implementing certain assets this year.
Just like the rebate checks, however, these tax deductions are only available for a limited time.
Successful health care providers, from individual practices to large entities, are constantly faced with the decision of when, and how, to invest in their own businesses. An important part of that decision is the total cost of the investment, including the potential tax benefits. Therefore, health care providers should know how the special tax deductions provided by the Act can benefit their businesses.
The Act provides two substantial tax deductions for business owners. It dramatically increases an up-front deduction, under § 179 of the Internal Revenue Code, for qualifying business property that is put into service this year. It also provides for a “Bonus Depreciation” deduction allowance, under § 168(k) of the Internal Revenue Code, for newly acquired and qualifying property that is put into service this year. Either provision alone provides a substantial tax break, but together, the two provisions create a unique and powerful incentive for business owners to improve their business by purchasing capital items.
Increased deduction under § 179
Section 179 of the Internal Revenue Code allows businesses to deduct, as an ordinary business expense, the cost of qualifying property put into service during a calendar year.
Qualifying property is typically categorized as depreciable property owned by the business and used for a business purpose. It may include medical equipment, machinery, computers, certain software, office furniture, vehicles and other movable assets.
Prior to the Act, the maximum deduction allowed under § 179 for qualifying property would have been $128,000 in 2008. But the Act has nearly doubled that amount. The maximum deduction is now $250,000 for qualifying business property that is put into service in 2008.
As with any big tax break, there are important restrictions on the § 179 deduction. First, the qualifying property must be placed in service during the 2008 calendar year. The first date of actual use is not determinative because the property is considered placed in service when it is ready and available for its intended use.
Second, the taxable income for business owners availing the § 179 deduction must exceed their deductions and losses. In other words, a business owner seeking to take full advantage the deduction in 2008 cannot be operating at a loss after taking the deduction.
Third, the maximum amount of the deduction, $250,000, begins to decrease when the business spends more than $800,000 on qualifying property. Every dollar over $800,000 that is spent is taken away from the $250,000 deduction allowance. For example, if a total of $850,000 is spent on qualifying property, the amount of the allowable deduction would decrease the maximum deduction allowance by $50,000 to $200,000.
Regardless of these limitations, the § 179 deduction provides extremely useful tax savings for enterprising health care providers.
Bonus Depreciation allowance under § 168(k)
The Act also provides for a Bonus Depreciation deduction allowance under § 168(k) of the Internal Revenue Code.
The Bonus Depreciation deduction generally allows a taxpayer to accelerate the tax depreciation benefit for certain qualifying property acquired in 2008. Essentially, a taxpayer may elect to take a first-year bonus depreciation of 50 percent of the cost of qualified property in 2008, in lieu of the standard deduction schedule, followed by lesser depreciable amounts in following years.
The limits of the Bonus Depreciation deduction are somewhat similar to those for the § 179 deduction. For example, the Bonus Depreciation deduction is generally limited to qualified property that is put into service in the year 2008. But, the Bonus Depreciation deduction can be applied to certain qualifying property above the $250,000 maximum deduction provided by § 179. In fact, if a business acquires qualifying business property this year, then the two provisions can work in harmony.
Maximizing the tax benefits of the Act
The two provisions, when used together, provide for a rare and significant opportunity that substantially increases the incentive for businesses to purchase and use capital equipment. The tax savings from the provisions may be maximized if the total cost of qualifying property is between $250,000 and $800,000.
For example, assume that a medical office purchases $600,000 of property this year that qualifies under both provisions and puts the property into service this year. The first $250,000 may be deducted under the § 179 deduction. Then, the Bonus Depreciation deduction may be applied to the remaining $350,000, and 50 percent of that amount, $175,000, would then be deducted. Together, a total of $425,000 of the $600,000 spent on qualifying property could be deducted during the 2008 tax year.
If that business was subject to a 35 percent tax rate, the deductions would mean a cash savings from income tax of $148,750. That is essentially a 25 percent discount off the $600,000 purchase price. Plus, the final $175,000 of the property’s value can be deducted in the coming years using the standard depreciation tables.
In addition to the direct tax reductions, there are other potential benefits for electing the Act’s special deductions this year.
For example, electing the deductions may lower a business owner’s adjusted gross income (AGI). A reduction in AGI may affect a business owner’s applicable tax rate and may help a business owner qualify for other valuable deductions that phase out at higher income levels.
On the other hand, electing to take a substantial depreciation deduction in the first year that property is put into service reduces the amount of tax depreciation deductions otherwise available in future years. In addition, electing the deductions may have an effect on business state tax liability under the new Michigan Business Tax Act.
Ultimately, every taxpayer’s situation is different and business owners, of course, should consult their tax advisors to determine the proper course of action.
Health care is a constantly evolving industry. Successful health care providers need to keep up with the changes in their field by periodically investing in the assets of their business. The Economic Stimulus Act of 2008 provides important incentives for health care providers who choose to make those capital purchases this year.
Note: The examples used herein are approximate and every taxpayer’s situation is different. Pursuant to IRS Circular 230, nothing contained herein is intended to be used, and may not be used, by any recipient hereof, intended or otherwise, for the purpose of seeking to avoid penalties or other impositions as to reporting for federal or state tax purposes or, for the purpose of marketing, promoting or recommending to another party any entity, investment plan, or arrangement, existing or to be formed.
The above article is for general information purposes only and is not advice for action or inaction. All readers should consult a tax advisor prior to taking any actions in pursuit of the subject matter hereof.
Louis C. Szura is an associate at Frank, Haron, Weiner and Navarro, PLC, and is licensed to practice in