Bookkeeping and Taxes
In the not-so-distant past, chiropractors spent hundreds of hours or large amounts of money hiring a programmer to set up an automated bookkeeping system for their practice.
Fortunately, the days of cumbersome, manual systems is long past and today there are a number of affordable and full-featured accounting software packages from which to choose.
These popular accounting packages not only allow you to track and manage every aspect of your practice's finances, they also save the time and effort usually expended producing tax returns and/or financial statements.
Expenses can also be reduced for the accounting software and the computers needed to operate it — and many other practice operations — thanks to our tax laws.
Expense and immediately write off the cost of a computer or depreciate it to benefit from smaller tax deductions over the next few years when the practice is, hopefully, in a higher tax bracket thanks to even more profits. That is only the tip of the iceberg when it comes to the federal tax laws and computer write-offs.
Whether for exclusive use in an office environment, performing mobile services, or as an integral tool in a home office, computers are considered "listed" property under our tax rules and are subject to special rules — both restrictive for and beneficial to you or your practice.
Before delving into the listed property restrictions and the software so many rely on, consider the potential tax write-offs for that routine computer purchase.
Under our federal tax rules, computers and peripheral equipment are classified "qualified technological equipment" and, as such, are usually written-off or depreciated over a five-year period.
The American Recovery and Reinvestment Act (ARRA) that became a reality late last year increased the write-off possibilities. The increased Section 179 first-year expensing allowance has, for example, been extended one year.
Section 179 property is depreciable personal property when purchased for use in the active conduct of a trade, practice, or business. An expense deduction allows chiropractic professionals who choose to treat the cost of qualifying property, such as equipment and other practice property, called Section 179 property, as an expense rather than as a capital expenditure. Off-the-shelf computer software placed in service in tax years beginning before 2010 is also treated as Section 179 property.
Under current tax law, there is a dollar limit on the maximum amount of Section 179 property a chiropractic practice may expense and immediately write-off during the tax year — $250,000. That annual dollar limitation is reduced, dollar-for-dollar by the cost of Section 179 property placed in service during the year in excess of an investment limitation — $800,000.
A unique and temporary bonus
A new, and temporary, 50 percent bonus depreciation deduction was contained in the ARRA for qualifying depreciable property acquired after Dec. 31, 2007, and placed in service before Jan. 1, 2010. Unlike the Section 179 expensing election, however, there is no limit on the total amount of bonus depreciation that may be claimed in any given tax year.
The bonus allowance is only available for new property (i.e. property whose original use begins with that taxpayer) depreciable under the Modified Accelerated Cost Recovery System (MACRS) and has a recovery period of 20 years or less. Off-the-shelf computer software depreciable over three years under Section 167(f) also qualifies for bonus depreciation.
Unfortunately, as outlined later, listed property used 50 percent or less for business does not qualify for bonus depreciation.
To deduct or not to deduct
Would your practice be better off with a small, current tax deduction to offset low or nonexistent income in a startup or slow year? Would additional write-offs in later years benefit you or your practice as its financial picture improves? Would an immediate tax deduction for those expenses this year help keep the tax bill manageable? Or, perhaps, this year's extraordinarily great income would benefit from a "supersized" tax write-off or tax credit?
Fortunately, the Section 179 expensing allowance, as well as "bonus" depreciation is optional. These and many other tax write-offs can be ignored by any chiropractor or practice wishing to take advantage of a tax deduction in a later more profitable year.
Of course, the basic depreciation deduction, whether claimed on the annual tax return or not, cannot be postponed until a later year. The depreciation deduction must be taken into consideration when the underlying asset is sold or otherwise disposed of.
Depreciation deductions for "listed property" are subject to special rules.
Computers and peripheral equipment, cellular telephones, and similar telecommunications equipment are lumped into the "listed property" category along with cars, boats, airplanes, and "amusement property" because all lend themselves to personal use.
As listed property, unless used more than 50 percent for business, no deduction can be claimed. In fact, unless used more than 50 percent for business, depreciation deductions on listed property must be determined under an alternative depreciation system (ADS).
If the listed property satisfies the "more than 50 percent business use" requirement in the year it is placed in service but fails to meet the test in a later tax year, depreciation deductions (including bonus depreciation) previously taken are subject to recapture (payback).
MACRS depreciation for years preceding the year in which the business use fell to 50 percent or less is recaptured to the extent that the MACRS depreciation (including any bonus depreciation) for such years exceeds the depreciation that would have been allowed under ADS. Depreciation thereafter must be computed using ADS.
Booting up computer software write-offs
Generally, the purchase of computer software can be best compared to the purchase of any practice asset: If computer software has an expected useful life of longer than one year, its cost should be written-off or deducted over a 36-month period.
Although treated as a capital asset, most off-the-shelf software can, at least for the time being, be expensed and immediately deducted as Code Section 179 property.
Depreciable off-the-shelf computer software placed in service during the 2009 tax year could be expensed and immediately written-off under Code Section 179 of the Internal Revenue Code, our basic tax law.
Again, this is software readily available for purchase by the general public, is subject to a nonexclusive license and has not been substantially modified, and which is usually depreciable over three years.
Like computers, computer software placed in service from Jan. 1, 2003, to Dec. 31, 2010, is eligible for a Section 179 deduction. This means that 100 percent of the cost of software can be deducted in the year purchased.
When software comes with a computer and its cost is not separately stated, it is treated as part of the hardware and is depreciated over five years. Under Section 179, however, the entire computer system (including bundled software) can be written-off in the first year.
Website development costs
The IRS has yet to issue formal guidance on the treatment of website development costs. However, informal internal guidance suggests that one appropriate approach is to treat those costs like an item of software and depreciate them over three years.
It is clear, however, that taxpayers who pay large amounts to develop sophisticated sites have been allocating their costs to items such as software development (currently deductible, like research and development costs) utilizing the Section 179 first-year expensing election and even as currently deductible advertising expenses.
Abandon or donate
If your practice has some old computers, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. Naturally, if the equipment has been fully depreciated or written-off, no tax deduction is possible.
That's right, a chiropractic practice or business operated as a partnership, a limited liability company (LLC), or as an S corporation (a corporation that has chosen to be treated similarly to a partnership) can make a charitable contribution and pass the deduction through to the principal's tax return. A regular "C" corporation can of course deduct the charitable contributions.
On a similar note, a deductible loss may be claimed for the abandonment of any depreciable asset. The amount of that loss is the computer's adjusted basis. Of course, the owner must "manifest an irrevocable intent to abandon (discard) the asset so that it will neither be used again by the chiropractor or his or her practice nor retrieved for sale, exchange or other disposition."
What could be more clear? After all, every chiropractor may deduct what the tax laws calls a "reasonable allowance" for the exhaustion, wear, and tear of all property used in any trade or business — or for the production of income.
Unfortunately, as with many areas of our tax law, there's far more to computers, peripherals, and software deductions than a simple depreciation write-off. Fortunately, the benefits far outweigh the restrictions and limitations for those willing to adhere to the rules — and seek professional assistance whenever necessary.
Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be reached at 610-789-2480.