Section 179 – Tax Laws and Timing
Confusing as they may be, understanding federal tax laws can help with capital equipment sales
Where there’s confusion, there’s also opportunity. Despite the complexities of tax laws, it’s important to have a basic understanding of how certain tax codes, such as Section 179, work and how they impact your veterinarian customers. The working knowledge may add value to your relationship.
Tax laws and timing
With tax laws, timing is everything, according to Mike Walker, vice president and general manager, veterinary division, Midmark, Corp. (Versailles, Ohio). For instance, take Section 179, which enables a business to receive the tax benefit of a capital equipment purchase quickly. Specifically, Section 179, which was implemented in 1981, allows a business to recover all or part of the cost of certain qualifying property – including equipment – up to a limit, by deducting it in the year the equipment is placed into service, instead of recovering the cost by taking depreciation deductions.
“Let’s says a clinic is in a 28 percent tax bracket and profitable,” says Walker. “If they purchase $10,000 of capital equipment expenditures in 2009, under these conditions they can receive the entire $2,800 tax reduction on their 2009 tax return versus a fractional amount of the $2,800 benefit each subsequent year on a five-year depreciation schedule.” This presents an opportunity for veterinary clinics to maximize their tax advantage and maintain their competitive edge, he notes.
Typically, business owners reinvest annually in their company to maintain their competitive edge, he explains. “Some of those investments will include capital expenditures such that the business will establish a minimum annual reinvestment target equal to the amount of its capital equipment depreciation,” he says.
The rules for Section 179 have changed in recent years, providing even greater incentives for business owners to invest in their company through capital expenditures. In 2007, the maximum deduction a taxpayer could take was $125,000. In 2008, it increased to $250,000 for annual capital expenditures less than $800,000. This has carried over into 2009, possibly due to the current economy, according to Walker.
So, for veterinary clinics planning to make capital expenditure purchases of $800,000 or less in one year, Section 179 can work to their benefit, regardless of their tax bracket, he continues. “The amount of benefit realized is ultimately determined by the clinic’s tax bracket,” he says. For example, a clinic in a 28 percent tax bracket would realize a $2,800 reduction on a $10,000 capital expenditure purchase. In comparison, a clinic in the 15 percent tax bracket would realize a $1,500 tax reduction on that same $10,000 purchase, thereby reducing the purchase price by the amount of the tax reduction. “That is an attractive discount to many clinics,” he adds.
If the clinic spends over $800,000 in one year on capital expenditures, the amount of tax deduction is reduced by $1 for every dollar spent over the maximum $800,000 allowance. “An $850,000 capital expenditure leaves a clinic with a maximum eligibility of $200,000 tax deduction,” says Walker. So, a clinic in a 28 percent tax bracket eligible for a $200,000 tax deduction will net $56,000 in reduced taxes, he points out.
Distributor reps can provide a service for their customers by initiating a discussion of Section 179 and its implication for veterinary clinics. However, Walker advises veterinarians to direct their questions to their personal tax accountant.
“If reps understand the application of the [tax law], the greater risk is not bringing it up,” Walker points out. “They may find out their customers missed a great opportunity when they needed it most. Reps [who understand these laws] certainly can solidify their position in their customers’ minds as a knowledgeable stakeholder in the success of the practice.”