Adding a new clinical instrument has always been a smart investment because it differentiates your practice by adding new services. In this article, I will help you determine if an instrument will pay for itself and I’ll also help you understand the tax benefits available under U.S. tax code section 179. But you’ll have to act quickly to do your research, place the order and take delivery before the end of the year.
Section 179 of the IRS tax code was developed as a tax incentive for small businesses to stimulate capital investment. Instead of recognizing the cost of an instrument over several years, section 179 allows a business to deduct the entire cost all at once in the year it was purchased or leased. It is treated as a business expense and not a capital investment. That means that the profit of the business (or the income to the owner) is reduced by the instrument cost. When your income is reduced, personal income tax is reduced.
As a rough estimate, the tax savings for the practice owner is the same as the individual’s tax bracket as a percentage. For example, an OD who is in the 33% income tax bracket who buys an OCT for $60,000 will save $20,000 on her personal tax bill for the year. It is almost the same thing as getting the OCT for one-third off.
Most ophthalmic equipment and computer software qualifies for the section 179 deduction. Speak to your tax advisor for additional details.
What should you buy?
This is really up to you. You have to decide what is best for your practice. What gives you the most bang for the buck? But before buying anything, do some projections to see how much you can afford.
Will you pay cash for the item, borrow from a lender or lease it? If you’re paying cash, that means you can afford it, but keep in mind you need some cash reserves to cover emergencies and the general cash flow of a business. If you are borrowing or leasing, determine what the monthly payment will be and consider if you can afford those payments.
In some cases, your normal practice profit will cover the monthly cost. This is especially true if the practice is growing. Or perhaps you have recently retired a loan or reduced some other expense, which will free up some cash.
The new instrument might generate a new income stream and pay for itself. More on this below.
Here are some examples of equipment that might pay for itself:
An instrument that has a CPT code and is payable by Medicare and insurance plans. This is only true if you have not been able to bill for this procedure in the past. Replacing your older visual field unit does not bring in new revenue. But buying your first OCT or VEP/ERG device would.
An instrument that would allow you to charge a fee to the patient, such as a macular pigment density screener or an Optomap (as long as these are new screening services to your practice).
An instrument that allows you to charge more for a service. I place corneal topographers here, because if you do the test on all contact lens wearers and it causes you to raise the contact lens evaluation fee, it may pay for itself.
A piece of equipment that saves you money in a major way. The classic example is a lens edging machine, which can reduce your lab bills.
Many other instruments or software, such as a new EHR system, will make you more efficient and may have an indirect payback, but the savings is harder to calculate. These devices could save doctor time, improve practice marketing or might be an aid to staff morale, but the financial payoff is a judgment call.
How to calculate the payoff
To determine if equipment purchased will pay for itself, just do some simple projections:
How many new tests or services do you think you will perform in one year if you get the new device? Look at reports from your office management software for data on specific ICD-10 codes, number of exams performed in the past or how many contact lens evaluations you did. I once heard that you can project the number of OCTs you will run in one year by taking the number of threshold fields you did in the past year and multiplying by two. It is fairly close in my experience.
Multiply the fee by the projected number of tests and you have the annual gross revenue you can expect. Divide by 12 for the monthly revenue.
As an example, if you project to do 300 OCTs in 2017 and if we use the average Medicare payment of $45 (both eyes), you can anticipate new income of $13,500 for the year. That is $1,125 per month. If your lease payment on the OCT is $1,000 per month, the instrument would pay for itself.
For a new edger, project how many edging jobs you can do in one year (will you edge both single vision and multifocal?). Figure how much money you can save per job by using stock lenses and saving on the edging fee. Multiply the number of jobs by the average savings per job for the new revenue you will have to buy the equipment.
Investing in your practice generally provides a better return than any other investment vehicle.