In Part 1, we covered the basics of the increase to medical devices through this Excise Tax, and some basic questions on the Medical Devices Excise Tax. Today, we’ll finish with some steps you can take.
Section 179 Deduction:
If you pay this 2.3% Excise Tax, you will add the tax paid to the cost of the equipment purchased. You will then depreciate the cost of the equipment either over its useful life or claim the Section 179 election, which allows small business owners to write off the full cost of the business equipment they purchase all in one year. Please be aware that the maximum Section 179 deduction is slated to decrease to just $25,000 in 2013 – down from its 2012 limit of $139,000.
The reduced Section 179 max means a smaller depreciation deduction for small business owners in the year that the equipment is purchased. However, you will ultimately claim depreciation over its useful life equal to the full cost of the equipment. Please note that Congress has already discussed increasing the Section 179 deduction to current levels or higher as an incentive for business owners to make capital expenditures.
For example: Let’s say that you are planning to buy a piece of equipment for $100k. If you purchase the equipment in 2012, you can claim a Section 179 deduction of $100k in 2012. If you wait and purchase the equipment in 2013, you’ll claim a Section 179 deduction or $25k, and then will claim the remaining $75k over its useful life of 5 or 7 years. Either way, you will ultimately claim depreciation equal to the full purchase price of the equipment.
You should also note that since you will add the 2.3% excise tax to the depreciable basis in your equipment, you will end up deducting this tax as part of the depreciation you’ll claim. Assuming you are in the highest tax bracket and also pay state and local income taxes, you will save as much as 1% in income taxes by paying this 2.3% excise tax.
Buy By 2012?
If you feel that the government will keep the Section 179 deduction at the $25k level starting in 2013 and you want to avoid paying the 2.3% Excise Tax, finalizing your purchases of medical devices prior to December 31st will make the most sense. However, if you think income tax rates will increase substantially after 2012, then delaying the purchase of your equipment until 2013 or later, and depreciating that equipment over 5 or 7 years might save you taxes, even when factoring in this new Excise Tax.
With the November elections just weeks away, you might consider waiting to see which candidate wins the Presidency and which Party controls the Senate and the House of Representatives before finalizing your practice’s equipment purchases for the next year or two.