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By: Carole C. Foos, CPA Did you make investments in technology in 2015 or are you planning to do so in 2016? An investment advisor explains the tax benefits of these purchases.
Investments in technology are a necessity in every business; medical practices are no exception. If you have recently invested in a new EHR system, practice management system, or other new hardware or software system, you may be asking, “How can I get a hard dollar return on that investment?”
Generally, you can at least get a few tax deductions in the year of purchase for your technology expenditures.
Computer hardware that you purchase will be eligible for depreciation the year you start using it. You may be able to take the entire depreciation deduction in a single year under Section 179 of the Internal Revenue Code rather than spreading your deduction over a five-year period.
Section 179 also permits a deduction up to $500,000 for personal property you purchase each year provided your total personal property investment does not exceed $2,000,000 in that year. However, you cannot take a Section 179 expense deduction if your business has a net loss. If your Section 179 expense deduction would create a net loss for the business, you can deduct an amount up to the amount of your net income and carry forward the remainder to the next tax year. Alternatively, you, along with your CPA, may decide to spread the deduction over the useful life of the asset. This would generally mean you deduct the cost over five years (six tax years), taking a half-year deduction in years one and six.
Purchased, Non-Customized Software
Computer software has various treatments depending on whether it was purchased or leased. “Off the shelf” computer software, not custom designed, can also qualify for Section 179 expensing. In order to qualify for Section 179, the software must be purchased outright or leased under a capital lease, it has to be used in your business, and must be expected to last more than one year. It must also be readily available to the general public, cannot be subject to an exclusive license, and must not have been substantially modified. If the core software is standardized software and only minor customization is done for your practice, it should still qualify for expensing.
Leased or Licensed Software
If you lease or pay a license fee for your computer software, these expenses are deductible, similar to any other rental payments. They can be deducted either when they are incurred or when they are paid depending on whether you use the cash basis or accrual basis for tax purposes. If you purchase bundled software along with your computer hardware, it can be depreciated or expensed along with the computer hardware using the same method. If you purchase computer software that is substantially customized for your business or is specifically designed for you, it may generally be written off over a three-year period, but not eligible for Section 179 expensing.
Work with your professional tax advisor to determine what will be the most advantageous method for taking a tax deduction for your technology expenses. Your advisor can help you decide whether your expenditures are eligible for Section 179 expensing and whether expensing all in the current year makes the most sense for your business. The decision to invest in new technology for your practice is a big one. Make certain you consider potential tax benefits, as you look all the pros and cons.
Carole C. Foos, CPA is a principal and lead tax consultant with OJM Group (www.ojmgroup.com). She can be reached at 877-656-4362 or firstname.lastname@example.org
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.