Tax Break Benefits with Year-End Imaging Equipment Financing

November 17, 2017

Why the fourth quarter might be the best time to finance imaging equipment.

Financing capital equipment now may be the best financial decision diagnostic imaging facilities make all year because they can take advantage of 2017 Section 179 and Bonus Depreciation tax breaks before they expire on Dec. 31.

Many providers in radiology, oncology, women’s health, and every facet of imaging need to balance cost control efforts with technology investments so they can improve patient outcomes. By financing radiology equipment in the fourth quarter, imaging facilities can acquire the equipment they need, increase cash reserves, and benefit from tax advantages created by the United States government to encourage capital equipment investment.

Making the Most of Section 179
Here are three reasons the fourth quarter is an excellent time to move forward with an imaging equipment acquisition to gain the tax benefits of IRS Code Section 179:

1. Section 179 allows a capital equipment deduction of up to $500,000.

Imaging centers purchasing $2 million or less in capital equipment can deduct up to $500,000 of that expense immediately on their 2017 tax return. Financing can further enhance the bottom-line by eliminating the upfront cash outlay typical of an equipment purchase while still preserving the Section 179 deduction. It’s important to note that equipment must be financed and in place by midnight Dec. 31, 2017 to qualify for the 2017 tax year.

2. Capital equipment investments of more than $2 million need tax ownership management.

Imaging centers requiring more than $2 million in capital equipment investment in 2017 will need to manage the tax ownership of those additional assets to maintain a Section 179 write-off (there is a dollar-for-dollar phase-out of the deduction for purchases exceeding the $2 million threshold). By using a tax lease for assets exceeding the $2 million threshold, the leasing company becomes the tax owner of the equipment, which allows businesses to maintain the maximum Section 179 deduction on the assets for which they retain tax ownership.                         

3. Bonus depreciation of 50% for 2017 is scheduled to diminish in 2018.

Under the tax legislation adopted by Congress, businesses of all sizes can depreciate an additional 50% of the cost to acquire eligible equipment on their 2017 tax returns. This tax break has been extended through 2019, although it will phase down to 40% in 2018 and 30% in 2019.[[{"type":"media","view_mode":"media_crop","fid":"64518","attributes":{"alt":"Victoria Terekhova","class":"media-image media-image-right","id":"media_crop_5998510263125","media_crop_h":"0","media_crop_image_style":"-1","media_crop_instance":"8250","media_crop_rotate":"0","media_crop_scale_h":"0","media_crop_scale_w":"0","media_crop_w":"0","media_crop_x":"0","media_crop_y":"0","style":"height: 167px; width: 150px; float: right;","title":"Victoria Terekhova is a vice president specializing in health care equipment financing at Key Equipment Finance. ","typeof":"foaf:Image"}}]]

For many diagnostic imaging facilities, asset depreciation plays an important role in fiscal management. Most equipment acquisitions offer depreciation benefits, but determining whether a center can effectively use all depreciation requires some consideration. This is especially true for equipment-intensive businesses. Full taxpayers in need of the sheltering effect of equipment depreciation will typically benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement, and some leases. These options allow the user to deduct depreciation and interest charges from taxable income.

Additional Tax Lease benefits
Diagnostic imaging centers with a more complex tax situation also may want to consider a tax lease. Tax leases effectively trade tax depreciation for lower payments. Plus, tax leases allow the entire lease payment to be deducted as an operating expense on the business’ tax return. Following is a list of factors to consider when evaluating equipment acquisition options:

• Alternative Minimum Tax (AMT): Businesses near to or already paying alternative minimum taxes should be aware of the implications of purchasing assets. These organizations may not be able to effectively use all of the tax benefits associated with accelerated equipment depreciation. Consequently, they can experience an increase in the after-tax cost of acquiring an asset.

In contrast, a tax lease can minimize the creation of additional tax depreciation. The lessor records the equipment ownership and resulting depreciation, and because equipment leasing companies can more efficiently utilize the tax benefits associated with depreciation, the lessee can enjoy the savings in the form of lower monthly payments.

• Net Operating Losses/Tax Credits: A tax lease may also be advantageous for corporations with expiring Net Operating Loss (NOL) carryforwards or other similar tax credits. Depreciation deductions on purchased equipment reduce taxable income, sometimes preventing a business from fully using its available tax credits. Leasing allows companies to maximize the use of the credits to lower the tax liability. In this manner, tax benefits are passed on to the customer in the form of lower payments.

• Mid-quarter Convention: The mid-quarter convention states that if a company acquires more than 40% of its capital assets during the fourth quarter, it must recalculate its depreciation expense using the mid-quarter convention tables. Most companies attempt to avoid the mid-quarter convention by closely managing the amount of assets they purchase (and place in service) during the fourth quarter.

The benefit of any kind of equipment comes from its use, not its ownership. The fourth quarter puts additional focus on not only the tax advantages, but the benefits to patient care, of bringing new equipment online before the new year.

 

Victoria Terekhova can be reached at Victoria_Terekhova@KeyBank.com.