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MONTHLY TAX NEWSLETTEROctober 2012
Owners of medical and dental practices beware. Due to a provision included in the Affordable Care Act, the cost of medical devices is set to increase by 2.3% on January 1, 2013.
Called an Excise Tax, manufacturers are required to collect a tax equal to 2.3% of the sales price of each piece of equipment sold, and then remit that tax to the federal government. Unless the manufacturer decides to reduce their prices by 2.3%, expect to pay more for your purchases of medical devices starting in 2013.
Let's say you purchase a medical device for $10,000. As of January 1, 2013, your cost for that equipment will be $10,230. Make capital expenditures of $100,000 for your practice, and you'll pay an extra $2,300 for that equipment starting next year.
Here is some information provided by our friends at the IRS regarding this new tax:
The following questions and answers provide general information on the medical device excise tax. For more detailed information see the proposed regulations issued on Feb. 3, 2012.
Q. What is the medical device excise tax?
A. The medical device excise tax is a tax on the sale of certain medical devices by the manufacturer, producer or importer of the device.
Q. When does the tax go into effect?
A. The tax applies to sales of taxable medical devices by the manufacturer or importer after December 31, 2012.
Q. How much is the tax?
A. The tax is 2.3-percent of the price for which the manufacturer or importer sells the taxable medical device.
Q. Who is responsible for reporting and paying the medical device excise tax?
A. The manufacturer or importer of a taxable medical device is responsible for reporting and paying the tax.
Q. Will individual consumers be subject to any reporting or recordkeeping requirements?
A. No action is required by individual consumers.
Q. What form will be used to report the medical device excise tax?
A. The medical device excise tax is a manufacturers excise tax. Manufacturers excise taxes are reported on Form 720, Quarterly Federal Excise Tax Return.
Q. I’m not familiar with manufacturers excise taxes. Where can I learn more?
A. For more information about manufacturers excise taxes in general, see Chapter 5 of IRS Publication 510, Excise Taxes.
Q. Has the IRS issued guidance on the medical device excise tax?
A. The IRS and the Treasury Department issued proposed regulations on February 3, 2012. The IRS and the Treasury Department welcome comments on the proposed regulations.
Decreased Section 179 Deduction:
If you pay this 2.3% Excise Tax, you will add the tax paid to the cost of the equipment purchased. You will then depreciate the cost of the equipment either over its useful life or claim the Section 179 election, which allows small business owners to write off the full cost of the business equipment they purchase all in one year. Please be aware that the maximum Section 179 deduction is slated to decrease to just $25,000 in 2013 - down from its 2012 limit of $139,000.
The reduced Section 179 max means a smaller depreciation deduction for small business owners in the year that the equipment is purchased. However, you will ultimately claim depreciation over its useful life equal to the full cost of the equipment. Please note that Congress has already discussed increasing the Section 179 deduction to current levels or higher as an incentive for business owners to make capital expenditures.
For example: Let's say that you are planning to buy a piece of equipment for $100k. If you purchase the equipment in 2012, you can claim a Section 179 deduction of $100k in 2012. If you wait and purchase the equipment in 2013, you'll claim a Section 179 deduction or $25k, and then will claim the remaining $75k over its useful life of 5 or 7 years. Either way, you will ultimately claim depreciation equal to the full purchase price of the equipment.
You should also note that since you will add the 2.3% excise tax to the depreciable basis in your equipment, you will end up deducting this tax as part of the depreciation you'll claim. Assuming you are in the highest tax bracket and also pay state and local income taxes, you will save as much as 1% in income taxes by paying this 2.3% excise tax.
Buy By 2012?
If you feel that the government will keep the Section 179 deduction at the $25k level starting in 2013 and you want to avoid paying the 2.3% Excise Tax, finalizing your purchases of medical devices prior to December 31st will make the most sense. However, if you think income tax rates will increase substantially after 2012, then delaying the purchase of your equipment until 2013 or later, and depreciating that equipment over 5 or 7 years might save you taxes, even when factoring in this new Excise Tax.
With the November elections just one month away, you might consider waiting to see which candidate wins the Presidency and which Party controls the Senate and the House of Representatives before finalizing your practice's equipment purchases for the next year or two.
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