Tax Breaks for Capital Expenditures in Healthcare
By Odhra Labarraque, Senior Manager, Tax & Business Services
Healthcare providers should be aware of a favorable tax break that is still available for capital expenditures. Capital expenditures in the healthcare industry generally include buildings, medical equipment, computer technology, and office furnishings. Furthermore, because of rapid changes in technology and regulatory requirements, healthcare providers frequently need building renovations and improvements to stay current and provide the highest quality care to their patients. These capital investments are costly, and many practices prefer leasing over buying because it alleviates the upfront costs and they can immediately deduct the rental fees on their tax returns instead of dealing with depreciating the assets over time.
However, tax benefits are available for those who choose to buy instead of leasing. Bonus depreciation is covered under Internal Revenue Code Sections 168(k) and 179, which are two special provisions of the tax law that allow an upfront deduction for tangible personal property and certain qualified improvements to real property that are used in a trade or business. These provisions have been around for decades and have been subject to numerous changes over the years. Both of these tax rules provide a deduction for the cost of property in the first year it is placed in service, rather than over a period of time, with the intention of lowering your effective tax rate, increasing your cash flow, and incentivizing capital investment and growth for the economy.
Section 179 generally allows you to deduct 100% of the cost of depreciable business assets placed in service during 2022, up to a maximum of $1,080,000 ($1,050,000 for 2021). However, the total amount you can deduct is limited to your taxable income for the year and, when the purchase price of qualifying property exceeds $2.7 million ($2,620,000 for 2021), the deduction is reduced dollar for dollar.
Likewise, with bonus depreciation, you can deduct 100% of the cost of depreciable business assets that have a recovery period of 20 years or less, such as medical machinery and equipment, computers, appliances, furniture, certain software, and qualified improvement property. There is no dollar amount limit and it does not depend on taxable income, but property must be placed in service before December 31, 2022 to receive the full benefit. Unless Congress modifies the bonus deprecation program, the deduction is scheduled to decrease by 20% every year starting in 2023 until it is completely gone at the end of 2026.
When it comes to planning your capital expenditures and how you’ll recover the cost, it is important to work with your advisors to model the cash flow and tax benefits that can be achieved. Keep in mind, with the expected increase in tax rates, careful consideration should be made about the timing of this powerful deduction.
Although tax incentives like Section 179 and bonus depreciation can be beneficial during these difficult economic times, careful consideration needs to be given to the short- and long-term financial position of your practice. The Marcum healthcare industry team can help you plan for these favorable tax breaks.