Starting in 2016, the IRS changed the rules for the capitalization and depreciation of fixed assets with the introduction of Notice 2015-82. For many businesses, this change both simplifies record keeping and provides the opportunity to accelerate income tax deductions.
Notice 2015-82 provides for a $2,500 de minimus safe harbor election. This election allows taxpayers to expense asset purchases up to $2,500 per item, per invoice starting Jan. 1, 2016. For example, a physician’s office spends $60,000 for the purchase of 30 new computers for all of its employees. At $2,000 each, the purchases fall under the $2,500 de minimus per item, per invoice limit. Accordingly, this purchase does not get considered for capitalization and depreciation purposes, and instead, $60,000 is taken immediately as a deductible expense.
There are two caveats to keep in mind when applying the de minimus safe harbor. First, the $2,500 safe harbor must be applied for both internal book financial statement reporting and external tax reporting. Second, the taxpayer must have a capitalization policy in place for the $2,500 expensing.
The new rule is significant in that small- to medium-size businesses will find, in most situations, that they can immediately write off almost all asset purchases when combining it with existing provisions such as the Sec. 179 deduction and 50 percent bonus depreciation. For 2016 and 2017 (assuming no law changes affect 2017), most medical practices should be able to write off asset purchases on the $2,500 per item, per invoice basis, then expense items such as furniture, machinery and equipment up to $500,000 in total each year, and finally take 50 percent bonus depreciation on original use items (i.e. not used items) such as furniture, machinery, equipment and certain leasehold improvements. These rules are applied in the following example: In 2016, ABC Physicians purchased and placed into service 100 chairs at a cost of $600 each, 10 work stations at a cost of $1,500 each, 10 exam tables at a cost of $4,500 each and one new MRI machine costing $475,000. The tax result under the new safe harbor rules for 2016 is as follows:
- $60,000 expense for the chairs
- $15,000 expense for the work stations
- The exam tables will have to be capitalized, but all $45,000 can be taken as a current-year expense under Sec. 179 up to $500,000.
- The MRI machine will have to be capitalized. $455,000 can be taken as a current-year expense under Sec. 179 to reach a total of $500,000. Of the remaining $20,000 ($475,000 minus $455,000), $10,000 can be taken as an immediate deduction under 50 percent bonus depreciation. The remaining $10,000 is depreciated over five years.
In the scenario above, $595,000 of assets are purchased with a resulting current year write-off of $587,000 (an extremely favorable tax result).
Medical practices should definitely look at whether they are taking advantage of the new $2,500 expensing rules under Notice 2015-82. This will involve both adopting a capitalization policy and then informing office personnel about the new expensing rules to ensure they are properly applied. Between this new rule and existing depreciation provisions, such as Sec. 179 expensing and 50 percent bonus depreciation, the opportunity to purchase assets and get an immediate tax write-off is better than ever.
Bennett Allison, CPA, CFP, is a shareholder at Sol Schwartz & Associates PC. He has over 21 years of public accounting experience serving individuals, corporations, S-corporations, partnerships, trusts, estates and nonprofit organizations. In addition, Allison works with a high concentration of physician practices and high-net-worth individuals. Contact Allison at email@example.com or 210-384-8000, ext. 138.