Just say no to write-offs It is not easy trying to break a life-long habit of minimizing income and maximizing deductions in order to produce a low
tax bill. It is even more difficult when lawmakers tout increased deductions as a cure-all for our economy. Surprisingly,
however, the lowest tax bills often result from legitimate tax deductions postponed or ignored altogether. A good example is provided by a start-up operation. A new practice rarely generates a great deal of income. In that situation,
even regular tax deductions may be wasted. As many veterinarians are aware, the tax rules allowing for the recovery of amounts spent for equipment do not match tax depreciation
with economic depreciation. The write-off period for newly acquired capital assets differs greatly between the period when
the building, fixtures or equipment will contribute to the profits and what the law considers an asset's "useful" life. In addition to a shorter useful life or write-off period, the new rules encourage investment in practice assets by allowing
accelerated depreciation. In other words, even under the basic method of depreciation, write-offs are accelerated, greater
in the earlier years when out-of-pocket expenses are greater, with smaller deductions in later years. However, neither accelerated depreciation nor the first-year write-off is mandatory. When depreciation deductions are not
claimed, they do accrue and figure in the computation for gain or loss when property eventually is sold. A veterinarian can ignore the standard system of depreciation, choosing instead a slower, more even write-off such as the
straight-line method. The Internal Revenue Service reportedly looks more closely at businesses choosing an alternative depreciation
method, but the lower tax bills in later, more profitable years, might be worth it. Remember that any amount disallowed as the result of the taxable-income limitation may be carried forward to a more profitable
tax year. The deduction for amounts carried forward and the amounts expensed in a carry-forward year may not, however, exceed
the maximum annual dollar-cost ceiling, investment limitation or, if lesser, the practice's taxable income. Left unanswered in the 2008 stimulus package are questions such as these:
- How can a troubled veterinary practice afford new equipment or property acquisitions?
- Where will a practitioner find financing for additional equipment?
- Will those new write-off limits and the bonus depreciation really stimulate the economy of your practice?
Mark E. Battersby is a financial consultant in Ardmore, Pa.
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