the essential EHR system selection guide - free download

    insync healthcare solutions revenue cycle management services

      4 min read

      2021 Section 179: Up to $1 Million in Tax Credits but Time is Short

      Featured Image

      The deadline to qualify for up to a million-dollar tax deduction on the 2021 purchase of new EHR software is Dec. 31. Sound too good to be true? Not under Section 179 of the tax code. By law, you can deduct the full purchase price for software acquired during 2021. Read on for updates to Section 179.

      2021 SECTION 179 DEDUCTION 

      Great strides have been made since Section 179 was first introduced in 1958. As recently as 2002, for example, Section 179 allowed for deductions of no more than $25,000. Today, after recent radical deduction increases, Section 179 can save a practice up to $1.05 million annually.

      What this means is that instead of depreciating expenses over a number of years, qualifying expenses on items such as EHR software can be fully deducted all at once in a single tax year.

      What makes Section 179 extraordinary is that it eliminates years-long waits for reimbursements and is a tax boon for the small- to medium-sized practices for which it was primarily designed. Large practices also benefit from the deduction, though they often are more susceptible to phase-out limitations.

      Why does Section 179 exist? In part, it’s to reduce tax burdens on practices and other businesses. But the impetus behind the tax code is to encourage practices to reinvest in themselves. That is, to reinvest in technology such as software, computer systems, and other tangible practice needs.

      In best-case scenarios, financing equipment purchases could leave you with more money in the bank than you started within the current tax year!

      QUALIFYING MEDICAL PRACTICES

      For 2021, $1,050,000 is your maximum allowable deduction for qualified purchases up to $2,620,000. This is a $10,000 deduction increase over 2020.

      It’s important to know that once you exceed that $2,620,000 threshold, your deduction begins to dwindle. That is, for every declared dollar spent above $2,620,000, one dollar is subtracted from your $1,050,000 deduction maximum. So, once you reach $3,670,000 in qualified expenses, your deduction is zero.

      For most small- and medium-sized practices, this shouldn't be a problem. For large practices, it could, but that's the way 179 is designed to work.

      Two questions:

      • Can you declare only SOME of your 2021 purchases for Section 179 deductions (so that you don't exceed the $2,620,000 threshold)?
      • And can you save some of your 2021 purchases for tax breaks in future years?

      The answer to both questions is yes.

      Qualifying 2021 purchases not declared on your 2021 tax return can be saved for normal "straight-line" depreciation deductions in succeeding years. Most tangible goods used by American businesses, including “off-the-shelf” software and business-use vehicles (restrictions apply), qualify for the Section 179 deduction.

      However, be aware of these Section 179 provisions:

      • Equipment and/or software must have been purchased, financed, or leased during the 2021 calendar year
      • Equipment and/or software must have been placed into service between January 1, 2021, and December 31, 2021

      In other words, you can't get Section 179 deductions for 2021 purchases on your 2022 return. But you can split the expense of a single purchase over multiple years. That is, if a practice spent $100,000 on a new computer or software system in 2021, it could use Section 179 deductions for half ($50,000) on its 2021 tax return and depreciate the rest on future tax returns.

      What if your practice spent well beyond the $2,620,000/$3,670,000 phase-out limits of Section 179 in 2021? In that case, you can use the Bonus Depreciation, which is a tax benefit that allows for 100% depreciation on qualified expenses. In contrast to Section 179, there are no spending limits for 2021 purchases, though some conditions apply.

      COVID-19 DEDUCTIONS

      For practices burdened by 2021 COVID-19 expenditures, Section 179 is a godsend. Most COVID-19-related purchases qualify for deductions, meaning everything from big-ticket items such as ventilators to other smaller items such as:

      • PPE
      • Sanitizer stations
      • Temperature-check stations
      • Plexiglas dividers or shields
      • Printed signage (for example, hand-washing instructions, “6 feet apart” floor stickers, and “Masks Required” door signs, etc.)
      • Equipment for modifying employee workspaces

      IT’S WORTH NOTING:

      • Section 179 is a use-it-or-lose-it proposition: Section 179 deductions are good only for the tax year in which qualifying purchases are made and put into service. In other words, purchases made in 2021 can't be applied to Section 179 deductions on your 2022 return.
      • Both new and used equipment qualify for the Section 179 deduction and Bonus Depreciation on 2021 returns, but "used" equipment qualifies only if it is “new to you.”
      • If you don’t use the Section 179 Deduction for 2021 purchases on your 2022 tax return, you can still get normal depreciation deductions for those purchases on tax returns after 2021.
      • Although Section 179 provisions are typically applied prior to Bonus Depreciation, the exception is if your practice had no taxable profit.
      • After 2022, the 100% Bonus Depreciation will be reduced by 20% per year for four years until it is phased out altogether after 2026.
      • The Section 179 Deduction was only $25,000 from 1958 to 2002, then increased to $100,000 in 2003, $250,000 in 2008, $500,000 in 2010, and $1M in 2017.

      SOFTWARE PURCHASES

      The software does qualify for the Section 179 deduction but some stipulations apply. The software must:

      • Be used for income-producing activities.
      • Be expected to last more than 1 year but also have a determinable useful life.
      • Be purchasable by the general public and subject to a non-exclusive license (everyone can get it).
      • Not be heavily modified (i.e. the code).
      • Be purchased with a specific qualifying lease or loan.
      With financing, you can actually deduct the full amount of the equipment and/or software without paying the full amount this year. In many cases, your bank account will actually be larger than it would have been if you had never financed the purchase in the first place! This means you can see an immediate return on investment dollars spent on a piece of software or equipment for your practice.

       

      NEED-TO-KNOW NUMBERS

      • 2021 Deduction Limit = $1,050,000
      • 2021 Spending Cap on Equipment Purchases = $2,620,000
      • 2021 Dollar-for-Dollar Phase Out = $2,620,000 to $3,670,000
      • 2021 Bonus Depreciation = 100%

      THE LIMITS OF SECTION 179

      Section 179 isn't without its own exceptions. Once your purchase price for equipment exceeds $2.62M, your deduction for 2021 will begin to phase out. If your total write-off amount exceeds $1.05M, you're officially over the available cap.

      HOW DOES THIS HELP MY PRACTICE FINANCIALLY?

      By deducting the full cost of your medical equipment or software, including electronic medical records and/or practice management software, you substantially lower the overall amount you must pay. The deduction you take may exceed the total loan or lease payments you make for the year, making your deduction process a more financially beneficial move.

      ARE THERE ANY TOOLS ONLINE TO HELP ESTIMATE MY DEDUCTION?

      Yes! Check out the Section 179 tax calculator on Section179.org.

      If you're considering an upgrade on your existing EHR or EMR software, we've put together a great buyer's guide as a resource. Click the image below to download it for free.

      emr or ehr free selection guide download

      Finally, Less Stigma for Those Suffering with Major Depression

      Since roughly the dawn of man, if you suffered from depression then it was a pretty sure bet you were stigmatized for it. Maybe you were shunned...

      Read More

      Best Treatment for Insomnia Significantly Decreases Risk of Depression

      There are three truths about insomnia and depression. One is that insomnia can lead to depression. Another is that depression can lead to...

      Read More

      Psychedelics, a Speedy, Long-Lasting Treatment for Mental Illness

      Psychedelic drugs earned a bad reputation during the 1960s when users on LSD “trips” experienced either euphoric stimulation or tremors, nausea,...

      Read More