As you begin preparation for your 2020 tax return, it's worth knowing how increased Section 179 deduction limits can save your medical practice big money on qualifying purchases made during 2020. Read on for updates to Section 179.
The Section 179 Deduction in 2020
As recently as 2002, Section 179 allowed for deductions of no more than $25,000. Today, after recent radical deduction increases, Section 179 can save your practice more than $1 million annually. How? By allowing you to deduct the full purchase price of qualifying equipment and/or software acquired during the tax year.
In other words, instead of depreciating expenses over a number of years, qualifying expenses can be fully deducted all at once in a single tax year - as long as that equipment or software was put into service during the year in which it was financed, leased or purchased.
In short, Section 179 eliminates years-long waits for reimbursements and is a tax boon for the small- to medium-sized practices for which it was designed. Large practices also benefit from the deduction.
The impetus behind Section 179 is not just to reduce tax burdens. It's also to encourage practices to reinvest in technology – including computer systems and software – and other tangible practice needs.
In best-case scenarios, financing equipment purchases can leave you with more money in the bank than you started with in the current tax year!
Qualifying Medical Practices
For 2020, $1,040,000 is your maximum allowable deduction for qualified purchases up to $2,590,000. Once you exceed that threshold, your deduction begins to dwindle. That is, for every declared dollar spent above $2,590,000, one dollar is subtracted from your $1,040,000 deduction maximum. So, once you reach $3,630,000 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 was designed.
Can you declare only SOME of your 2020 purchases for Section 179 deductions (so that you don't exceed the $2,590,000 threshold)?
And can you save some of your 2020 purchases for tax breaks in future years?
The answer to both is yes.
Qualifying 2020 purchases not declared on your 2020 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 2020 calendar year
Equipment and/or software must have been placed into service between January 1, 2020 and December 31, 2020
In other words, you can't get Section 179 deductions for 2020 purchases on your 2021 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 2020, it could use Section 179 deductions for half ($50,000) on its 2020 tax return and depreciate the rest on future tax returns.
What if your practice spent well beyond the $2,590,000/$3,630,000 phase out limits of Section 179 in 2020? 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 2020 purchases, though some conditions apply.
For practices burdened by the unanticipated COVID-19 expenditures of 2020, 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:
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 2020 can't be applied to Section 179 deductions on your 2021 return.
Both new and used equipment qualify for the Section 179 deduction and Bonus Depreciation on 2020 returns, but "used" equipment qualifies only if it is “new to you.”
If you don’t use the Section 179 Deduction for 2020 purchases on your 2020 tax return, you can still get normal depreciation deductions for those purchases on tax returns after 2020.
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 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.
Yes, software does qualify for the Section 179 deduction but there are some stipulations. 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.
2020 Deduction Limit = $1,040,000
2020 Spending Cap on Equipment Purchases = $2,590,000
- 2020 Dollar-for-Dollar Phase Out = $2,590,000 to $3,630,000
2020 Bonus Depreciation = 100%
The Limits of Section 179
Section 179 isn't without its own exceptions. If your equipment purchase price is over $2.59M for 2020 your deduction will start to phase out. If your write-off amount is over $1.04M, 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 available on Section179.org.
If you're considering an upgrade to 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.