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ACCOUNTING NOTES

Tax deductions for equipment purchases

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s the result of a $170 billion economic stimuluspackage, passed by Congress and signed by Pres-ident George W. Bush in February, most American

axpayers are receiving tax rebates of $600 ($1,200 forarried tax filers, along with, in many cases, $300-per-

hild tax credits) this year. However, practicing optom-trists may not yet realize the potential benefits of otherajor provisions in the economic stimulus. Specifically:

ax incentives for the purchase of equipment and similarusiness assets.

Although the stimulus package is intended to encouragequipment purchases by all segments of American industry,mall- to medium-sized businesses that can qualify for bothf the asset purchase deductions authorized in the legisla-ion stand to reap the greatest benefit. Optometrists may findhe deductions are nearly custom tailored to the needs ofheir practices in terms of types of business assets coverednder the package and the dollar amounts of the deductionsor which they may qualify. Expenditures for new ophthal-ic equipment, computer systems, and even office improve-ents can be the basis for deductions under the package.owever, practitioners should be aware that a number of

tipulations apply to the deductions. Most important, prac-

his article was reviewed by Kenneth E. Hicks, C.P.A., a senior partner inhe firm of May & Company, LLP, and Katie F. Feibelman, a member ofhe professional staff of May & Company, LLP. The firm consults withptometrists in 30 states, assisting with their tax planning and preparation,uickBooks support, and business planning. May & Company was estab-

ished in 1922 and has offices in Louisiana, Mississippi, and Alabama.icks and Feibelman can be reached at (601) 636-0096 or by e-mail at

enhicks@maycpa.com. Opinions expressed are not necessarily those of

pecial tax deductions, provided underhe 2008 federal economic stimulusackage, can make it advantageous forptometric practices to purchase newquipment, update computer software,nd even improve leased office spacehis year. However, practitioners need toct now.

he American Optometric Association.

529-1839/08/$ -see front matter © 2008 American Optometric Association. Alloi:10.1016/j.optm.2008.04.002

itioners must remember that they must act on equipmenturchases in 2008.The stimulus package includes 2 separate tax law changes

hat will allow business owners to take greatly increasedeductions for equipment purchases or similar businessmprovements this year, instead of depreciating those assetsver time, increasing tax savings in the process, accordingo the Internal Revenue Service (IRS).

ncreased Section 179 limitshe stimulus package increases the 2008 maximum deduc-

ion that a business can take in a tax year, under Section 179f the U.S. Internal Revenue Code, to $250,000. That nearlyoubles the 2007 annual maximum of $128,000. The in-reased maximum deduction will, in many cases, effectivelyllow businesses to deduct most or all of the cost ofualifying assets in the year they are first placed in service.he deduction can be used by businesses with up to800,000 in annual qualifying equipment purchases, uprom a previous cap of $500,000. The expanded deductionpplies to most depreciable business assets—includingquipment and most purchased software—however, it doesot cover real estate. It applies to the purchase of both newnd used equipment. However, to qualify for the deduction,ualifying assets must be placed in service during fiscaltax-reporting) years that begin during 2008. The expandedection 179 deduction is available only to small- andedium-sized businesses; however, that will include most

ptometric practices. The deduction is also limited to tax-ble income from the practice; a practitioner would not bellowed to create a loss for the practice using the Section79 deduction.

pecial depreciation allowancen addition, a separate “first-year” depreciation allowancenables practitioners to immediately deduct 50% of theepreciable cost of qualifying new assets that are bothurchased and placed in service during 2008. This so-calledbonus depreciation” is to be taken after any Section 179eduction and before figuring any regular depreciation de-uction. (The tax laws provided a similar 50% bonus de-uction several years ago. However, over recent monthsnly areas affected by Hurricane Katrina have been allowedhis type of deduction.)

Assets that can qualify for this special depreciation allow-nce include:

● Most equipment (tangible property depreciated under

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the tax code’s modified accelerated cost recovery sys-

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Practice Strategies 351

tem [MACRS] with a recovery period of 20 years orless).

● Off-the-shelf computer software● Qualified leasehold improvement property

It should be emphasized that to qualify for the deduction,he equipment purchased must be new. The equipment muste both purchased and placed into service in 2008. Anxception is allowed for equipment with a long service lifeindicated by a depreciation recovery period of 10 years oronger), providing a “place in service” deadline of Decem-er 31, 2009. Equipment that is already in the practice orhat the practice contracted to purchase before the start ofhe 2008 tax year does not qualify for the 50% bonuseduction.To qualify for the 50% first-year bonus depreciation

llowance, leasehold improvements must meet several cri-eria:

● The improvement must be to the interior portion of abuilding.

● The building must be nonresidential real property.● The improvement must be made pursuant to or under

a lease by either the lessee (or sublessee) or the lessorto property that will be occupied exclusively by thelessee (or sublessee).

● The improvement must be placed in service more than3 years after the date the building was first placed inservice.

The economic stimulus package creates the potential foreal tax savings for optometric practices, which, in manyases, should qualify for both the expanded Section 179eduction privilege and 50% first-year bonus depreciation.or example, the 50% first-year bonus depreciation could

llow a practice to immediately deduct half of the cost of a i

ew asset if it is purchased and placed in service during008. The practice could then write off the remaining costf an asset through the Section 179 deduction or regularepreciation deductions over the asset’s designated recov-ry period. Combining the 2 breaks would offset a majorortion of a practice’s taxable income for the year—oraybe all of it.However, as with any income tax–related matter, optom-

trists should consult a qualified accountant, tax preparer, orax attorney for advice on the new economic stimulusackage tax breaks before purchasing equipment or makingffice improvements. The new 2008 tax deductions maylso be subject to any number of additional rules andtipulations.In addition, the package also provides new deductions for

ome additional categories of assets, such as automobilesnd trucks used primarily for business purposes, which maye applicable to some practitioners.The complicated nature of the tax law aside, the potential

eductions offered under the 2008 economic stimulus pack-ge clearly offer potential benefits for practitioners whoish to update their offices. Ophthalmic equipment manu-

acturers continue to regularly introduce new devices thatan enhance patient care and increase practice efficiency.merican Optometric Association surveys reveal optome-

rists regularly adopt the latest in ophthalmic technology inheir practices. Encouraged by government and privatensurance plans, many practitioners are today consideringlectronic health records and e-prescribing systems for theirractices. Equipment purchase tax deductions offered underhe economic stimulus package can make it easier forptometrists to incorporate such state-of-the-art equipment

n their practices.