Tax Planning Tips for the Optometric
These helpful pointers should make tax time more bearable.
BY JOHN P. PARIS, C.P.A., Vicksburg, Mississippi
ILLUSTRATION BY JOHN
With 2004 rapidly coming to a close, optometrists need to consider making adjustments in their practices to save tax dollars. The depreciation rules on assets placed in service this year make equipment purchases one of the first items to consider in tax planning.
I'll review some effective tax time tips that can benefit your practice. For the busy optometrist, two items are proven tax planning tools that work well for practices:
1. The Section 179 expensing limitation has been increased to $102,000, allowing you to deduct that amount of business equipment purchased in 2004. The election is phased out when your total equipment purchases exceed $410,000 for the year.
2. There's a 50%, first-year bonus depreciation for qualifying assets you purchase this year.
The purpose for both of these items is to encourage the buying of more equipment, thereby stimulating the economy. When you consider using these tax-planning tools, it's important to understand all of the points of the law.
Section 179 depreciation
Retroactive to January 31, 2003, the maximum amount of equipment purchases that an optometric practice can expense (meaning the amount that a practice can deduct entirely in the year the assets are placed in service) quadruples from $25,000 to $100,000, indexed annually for inflation. For tax year ending Dec. 31, 2004, this amount is adjusted to $102,000. This applies to new and used equipment and is retroactive to January 1, 2003. However, it's a short-lived tax planning tool because it's set to expire Dec. 31, 2005.
50% Bonus Depreciation
The Tax Act grants a bonus 50% first-year allowance for depreciation on a qualified property's depreciable basis. Generally, you would calculate depreciable basis as the property's cost or other basis, reduced by Section 179 expense deduction and disabled access credits, if available. The fine print: The equipment must be new and you must have acquired it after May 5, 2003.
This is another short-lived law, as it is in effect only from May 6, 2003 to Dec. 31, 2004.
There is no alternative minimum tax (AMT) adjustment for expensed property. When planning your acquisitions this year, don't forget that the 50% bonus depreciation is slated to end after 2004 -- one year earlier than the increased Section 179 deduction.
You can use the Section 179 first, then apply the 50% Bonus on the remaining basis. Bonus first-year depreciation applies to most types of new, nonrealty assets, such as computers, most types of computer software and many other types of optometric practice equipment.
Leasehold improvements made under a lease to commercial property and placed in service more than three years after the building was first put in service qualify. Certain structural improvements don't qualify and neither do expansions.
An optometric practice may elect, on a property-class-by-property-class basis, to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all. A property class consists of all property placed in service during the year that's depreciable over the same period. Situations arise that might make it beneficial to elect smaller bonus first-year depreciation (or to elect out of it entirely).
For example, you'd likely consider electing reduced depreciation if your practice had a net operating loss carry-forward about to expire, or if you anticipate being in a higher tax bracket in future years.
ADA tax incentives
The Americans with Disabilities Act (ADA) is a federal civil rights act that aims to eliminate discrimination against disabled individuals. The ADA provides that businesses must grant full and equal access to the goods, services and facilities of any place of public accommodation for disabled people. Businesses must also make reasonable modifications to their practices or procedures to accommodate disabled individuals.
Although compliance is mandatory, the IRS provides tax incentives to small businesses that make improvements to comply with the ADA. One incentive is the Disabled Access Credit (a dollar-for-dollar reduction in your tax liability).
The Disabled Access Credit, detailed in Section 44 of the Internal Revenue Code, allows for eligible small businesses to take an annual credit for making their businesses accessible to persons who have disabilities. For the business to be eligible, it must have earned $1 million or less in gross receipts in the prior year or had 30 or fewer full-time employees. The credit is equal to 50% of qualified expenditures over $250, not to exceed $10,250, for a maximum credit of $5,000. The basis for depreciation must be reduced by the amount of credit taken.
Example: A business spends $12,000 in qualified expenses. The credit is equal to ($12,000 - $250) x 50% = $5,875. The practice could only claim the maximum credit of $5,000. The taxpayer's basis in the property would be $7,000 ($12,000 - $5,000).
The tax credit is available every year and covers expenditures that the eligible small business pays or incurs to comply with the requirements of the ADA. Just keep in mind that you can't claim the credit for any amounts that your practice incurred to completely renovate or build a facility or to replace depreciable property in the normal course of business. The expenditures you claim must be "reasonable and necessary" to comply with the ADA. This credit is part of the general business credit, which you can claim on Form 8826.
Expenses that are eligible for the credit include amounts paid or incurred to:
► provide sign language interpreters or alternate methods of providing audio materials to employees and customers who are hearing impaired.
► provide printed materials in alternate format for the visually impaired. (Alternate formats may include Braille, audiotape, qualified readers and even large print materials.)
► acquire or modify equipment or devices to accommodate individuals who have disabilities. (e.g., acquiring exam chairs that are wheelchair accessible and instrument stands modified to accommodate the handicapped.)
► remove architectural, communication, physical or transportation barriers that prevent a business from being accessible or useable by disabled individuals. (NOTE: This expenditure is only eligible when incurred on buildings placed in service before Nov. 5, 1990 and doesn't apply to new construction.)
To ascertain whether a purchase or modification meets the eligibility requirements, you need to make sure the purchase passes a two-part test:
1. Is the purchase for the primary purpose of complying with the ADA?
2. Is the expenditure necessary and reasonable to meet compliance with ADA?
If your purchases pass both parts of this test, then you'd be justified in claiming this credit. Obtain documentation from your vendor stating its position regarding qualified equipment for additional support.
Although these eligible expenses may seem straightforward, this credit remains a gray area for businesses as well as for accountants. The IRS maintains that not every business expense that benefits the disabled is entitled to the Disabled Access Credit. Unfortunately, no specific lists exist that detail what equipment is eligible for the credit. Recent litigation provides some guidance for optometrists.
What did the courts say?
In Hubbard v. Commissioner,
T.C. Memo 2003-245 (Aug. 14, 2003), the Tax Court allowed the taxpayer a $5,000 tax credit under Section 44 because his optometry practice is an eligible small business that falls within the definition of a public accommodation and he must make reasonable modifications to provide services to disabled individuals.
The court noted that in the year before the taxpayer purchased the automatic refractor, he had to refer about 30 disabled patients to other optometrists. The judge also noted that it was irrelevant that the taxpayer used the refractor to treat nondisabled patients.
However, in Fan v. Commissioner, 117
T.C. 32 (June 24, 2001), the disability access credit was not allowed to a dentist who purchased an intraoral camera system for use in his dental practice to help communicate with hearing-impaired patients. The judge distinguished Fan on the grounds that Fan was already ADA compliant.
What can you do now?
A little advance planning could save you time and money later. You, your investments and your practice may be favorably impacted by the changes brought about by the new tax law.
Don't miss an opportunity to save your tax dollars. Stay informed about ongoing changes in the tax lay. A consultation with your accountant now can provide you with current rules and pending legislation that may affect your particular situation.
John Paris is a partner in the firm of May & Company,
LLP, which consults with optometrists in 23 states, assisting with their tax planning and preparation services, and QuickBooks support. May & Company was established in 1922 and has offices located in Louisiana, Mississippi and
Optometric Management, Issue: October 2004