How new tax law aims to stimulate business

The $168 billion Economic Stimulus Package of 2008 includes rebates for taxpayers, plus tax breaks for businesses, including veterinary practices, retroactive to Jan. 1.

The business portion of the package doubles the amount of equipment expenditures a small practice can expense or immediately write off on its 2008 return from $125,000 to $250,000, with the investment limit increased from $400,000 to $800,000. It also allows a 50 percent bonus depreciation deduction for practices buying major equipment.

Bonus depreciation equal to 50 percent on new equipment is available, but only if the new property has a depreciable life of 20 years or less. The bonus depreciation applies to 2008 purchases only.

The new law also raises the limitations on so-called "luxury" auto depreciation. The cap originally was enacted because lawmakers did not want tax laws subsidizing the use of luxury vehicles by businesses. But because the definition of luxury is out of date, the new law will allow just over $11,000 as first-year depreciation on business-use vehicles in 2008.

Naturally, as with many options in tax laws, every veterinarian will have to decide for himself or herself whether the new limits will help stimulate the economy of his or her practice.

Section 179

Generally, the cost of veterinary-practice equipment is recovered via depreciation deductions spread over the useful life of that equipment. Under current rules, an immediate write-off is available to practitioners who choose to treat the cost of new equipment and property, called Section 179 property, as an expense rather than a capital expenditure.

Thus, in lieu of depreciation deductions, veterinarians with sufficiently small amounts of annual investment have the option of deducting (or expensing) equipment and property under Section 179. Such property is defined as depreciable tangible personal property purchased for use in the active conduct of a trade or business.

This has meant the cost of equipment, and in some cases software, can be claimed as an expense rather than depreciated. Originally designed to encourage small businesses to acquire more property and equipment, the Section 179 write-off limit was raised from $125,000 to $250,000.

The investment ceiling was increased from $400,000 to $800,000. Above that, the write-off is reduced, dollar for dollar, by the amount equipment or property exceed that ceiling.

A bonus depreciation

Another provision in the package is a 50 percent bonus depreciation deduction for qualifying, new depreciable property placed in service during 2008.

Once the cost of that new, depreciable property has been reduced by the Section 179 expensing allowance and the bonus depreciation, the amount remaining is depreciated or written off over the property's useful life.

Generally, the so-called "major equipment purchases" encouraged by lawmakers do not include buildings. But structures built as part of equipment or specifically to house equipment may have a useful life of less than 20 years and qualify for bonus depreciation.

Similarly, courts recently began allowing businesses to depreciate "components" of buildings separately, usually over a shorter period than the underlying building. Thanks to so-called cost-segregation studies, even existing buildings have been broken into segments, allowing faster write-offs for components that are not essential to the operation of the underlying building.

So-called personal property used in a building, such as furniture or components or parts identified as a result of a cost-segregation study, qualify for the 50 percent allowance if placed in service not later than 90 days after the building is placed in service.

Buildings, as mentioned, usually have useful lives longer than the 20-year ceilings and do not qualify for bonus depreciation.

Luxury cars

The term "luxury" as applied to some of the automobiles used by veterinary practices is far out of date. In 2007, for example, a vehicle was subject to the limitation if its value was at least $15,100 for passenger automobiles and $16,100 for trucks or vans.

Ordinarily, under the luxury-auto rules, the first-year limit on depreciation for passenger automobiles cannot exceed $3,060. (However, this was increased to $4,600 when bonus depreciation was previously available.)

The new law raises the cap to $8,000, if bonus depreciation is claimed. For a qualifying vehicle, a maximum first-year depreciation write-off of up to $11,060 or $11,260, respectively, for vans and trucks is permitted.

If the vehicle is not predominantly used for business in a subsequent year, the bonus depreciation must be recaptured.

Just say no to write-offs

It is not easy trying to break a life-long habit of minimizing income and maximizing deductions in order to produce a low tax bill. It is even more difficult when lawmakers tout increased deductions as a cure-all for our economy. Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored altogether.

A good example is provided by a start-up operation. A new practice rarely generates a great deal of income. In that situation, even regular tax deductions may be wasted.

As many veterinarians are aware, the tax rules allowing for the recovery of amounts spent for equipment do not match tax depreciation with economic depreciation. The write-off period for newly acquired capital assets differs greatly between the period when the building, fixtures or equipment will contribute to the profits and what the law considers an asset's "useful" life.

In addition to a shorter useful life or write-off period, the new rules encourage investment in practice assets by allowing accelerated depreciation. In other words, even under the basic method of depreciation, write-offs are accelerated, greater in the earlier years when out-of-pocket expenses are greater, with smaller deductions in later years.

However, neither accelerated depreciation nor the first-year write-off is mandatory. When depreciation deductions are not claimed, they do accrue and figure in the computation for gain or loss when property eventually is sold.

A veterinarian can ignore the standard system of depreciation, choosing instead a slower, more even write-off such as the straight-line method. The Internal Revenue Service reportedly looks more closely at businesses choosing an alternative depreciation method, but the lower tax bills in later, more profitable years, might be worth it.

Remember that any amount disallowed as the result of the taxable-income limitation may be carried forward to a more profitable tax year. The deduction for amounts carried forward and the amounts expensed in a carry-forward year may not, however, exceed the maximum annual dollar-cost ceiling, investment limitation or, if lesser, the practice's taxable income.

Left unanswered in the 2008 stimulus package are questions such as these:

• How can a troubled veterinary practice afford new equipment or property acquisitions?

• Where will a practitioner find financing for additional equipment?

• Will those new write-off limits and the bonus depreciation really stimulate the economy of your practice?

Mark E. Battersby is a financial consultant in Ardmore, Pa.