2010 Year End Tax Considerations for EMR Equipment & Software Purchases
Good Timing Can Help Practice Bottom-Lines Sooner Than Later
As many of us are in the throws of holiday preparation and party participation (say that 3 times with some eggnog ), attention still needs to be paid by medical practice owners and administrators to 2010 year end business purchases. Reason being ? Something called Section 179 depreciation. The IRS avails small businesses a great opportunity to maximize their purchasing power, especially with the increase to a maximum annual deduction of $500,000 for equipment and software purchased and placed in service in 2010 – 2012. The Small Business Jobs & Credit Act of 2010 increased the annual Section 179 depreciation deduction from $250,000 to $500,000. Because EMR systems are all about equipment and software for business purposes, EMR implementation does qualify quite nicely for the Sec 179 depreciation deduction, and related tax savings. Timed right, practices can take advantage of tax savings for 2010 that may come close or exceed the amount of payments they actually make on the equipment or software in 2010.
EMR computer equipment, software and peripherals need to be “placed in service” by 12/31/10 in order to qualify for the Section 179 deduction for the 2010 tax year.
What people need to be reminded of at this busy time of year is that they can still qualify for deducting the full cost of office, medical and computer equipment / software they purchase, so long as it is “placed in service ” by the end of the tax year they are trying to take the deduction for (in this case 2010). Even if a practice is in the earlier portion of the EMR implementation phase, it can still purchase computer equipment and peripherals (scanners, printers, faxes, etc) that they will need for their EMR system and get a deduction via Sec 179 depreciation for the full cost of the equipment in 2010. To gain the tax advantage sooner than later (2010 vs: 2011) practices just need to plug the equipment in and start utilization by 12/31/10 to constitute “placed in service”. Items purchased before 12/31/10 but left in the boxes sitting in the closet or trunk do not qualify for the Sec 179 deduction for 2010; a deduction would be able to be taken when set up and utilized in 2011.
I mention the computer equipment and peripherals as minimal time is typically needed to plug in a computer, printer, or fax machine, synchronize it and legitemately constitute “placed in service” before 12/31/10, and legitemately qualify for the Sec 179 deduction for the 2010 tax year. EMR software on the other hand requires more set-up and modification in order to be considered “placed in service” by the practice for IRS purposes. It would be a more challenging explanation to an IRS auditor that EMR sofware purchased on 12/28/10 was set up and in use by 12/31/10. Anyone who has read John Lynn’s e-book Selecting The Right EMR knows that 3-4 days for EMR software set-up is not quite the norm.
For software to qualify for Sec 179 depreciation when put into service it must be “Off-the-Shelf” software; meaning that it isn’t custom designed and is available to the general public. If the core software is standardized, a small amount of customization is acceptable, as is done with EMR systems. As an aside, the customization factor generally holds websites ineligible for Section 179 depreciation.
Practices can qualify for the Section 179 depreciation deduction in 2010 even if the equipment and software is financed and no payments are made in 2010
A practice has multiple payment and financing choices when it comes to acquiring the equipment and software for an EMR system, and thereby achieve some sizeable tax savings through the Sec 179 deduction. Business credit card, bank financing and equipment leasing are all viable options. A practice could actually purchase computer equipment and peripherals (as mentioned above) via credit card, line of credit or bank/lender term financing and qualify for the Sec 179 deduction of the full equipment purchase price in 2010, even without having made any payment toward the items purchased in 2010 – a nice cash flow management approach.
The thing to keep in mind when leasing the equipment and software is that in order to qualify for the Sec 179 deduction the lease needs to be a capital lease and not an operating lease. Capital leases are typically either a ” $1 Buyout Lease” or a “10% Purchase Upon Termination Lease”. In either case the practice will own the equipment and/or software at the end of the lease term. With an operating lease the practice is not considered to own the equipment/software at the end of the term, and thereby can only write off the lease payments as they are paid out each year (typcially over a 3-5 year term), rather than the full cost of the equipment and software in the year of purchase as can be done with a capital lease and Sec 179 depreciation.
The obvious advantage to leasing or financing equipment and then taking the Section 179 deduction is the fact that the full amount of the equipment can be deducted without paying the full amount for the equipment in the same year. The amount saved in taxes can actually exceed the payments, making Section 179 a very bottom-line friendly deduction. Compared to stimulus funds achieved by scaling Meaningful Use hurdles, tax savings through Section 179 depreciation is like money on the table – you just need to know about it and grab it. Something to keep in mind as 2011 New Years resolutions are being formulated. ______________________________________________________________________________________
Leslie A. Thomas, CPA is a Supervisor offering 20+ years of tax and healthcare advisory experience in the Healthcare Business Services segment at Nisivoccia LLP, a multidimensional CPA firm with offices in Mt. Arlington and Newton, NJ. The firm offers traditional tax, accounting and audit services, and maintains practice specialties in sectors including health care, technology, municipal government, education, nonprofit and financial services. Contact her at firstname.lastname@example.org or (973)-328-1825