As we approach the end of the year, equipment manufacturers are flooding their advertisements with reminders of the tax savings you can enjoy by purchasing new instruments and deducting them from your tax return. With this in mind, many optometry practices may be wondering if they should take the plunge and purchase the equipment they have been eyeing for ages.
Section 179 allows businesses to write off the cost of equipment in the year it was purchased, so long as it is put into service by December 31, instead of taking depreciation throughout the instrument’s useful life. In 2024, businesses can expense up to $1.22 million on equipment. (If you spend more than $3.05 million in eligible purchases, your write-off is reduced by the amount you exceed the threshold.) However, purchasing equipment may not always be in your best interest, even when considering the tax benefits.
Choose the Right Endpoint
As I’ve shared with practice owners in the past, managing your practice finances isn’t just about securing the lowest wholesale frame price. By rethinking your approach, you could avoid the cash flow challenges caused by purchasing $100,000 worth of product at a time.
The same logic applies to the question at hand. The lowest possible tax bill is not the best goal. Total cash flow, on the other hand, is a much more fitting endpoint.
The trouble with spending money to reduce your taxes is that you only save a portion of what you spend. If you buy a $100,000 IPL and your tax rate is 35%, you’ll save $35,000. But in terms of cash flow, you’re still down $65,000 ($100,000 for the IPL minus the $35,000 in tax savings).
At the same time, that IPL could be the key to meeting your 2025 goals of incremental cash-pay revenue growth and enhanced patient care. The point here is not to avoid investing in your practice, but to be sure you’ve made the business case for it first.
Other Considerations
Here are some additional thoughts on year-end investments:
- Interest rates today aren’t so high that I’d avoid using debt financing for an instrument that’s going to help your practice grow. For context, back in the early 1980s, interest rates were well above 10%—a fun fact for our younger readers!
- At the same time, interest rates are high enough that I would avoid the interest if you can pay cash for new investments.
- Finally, just because you can depreciate the total cost of a capital investment doesn’t mean you should. Talk to your CPA about whether it’s wiser to spread the depreciation across two or more tax years.
Accounting for Capital Investments
Whether you keep your books or outsource them to a CPA or firm like our team at Books & Benchmarks, accurate accounting of investments, loans, and depreciation is essential to managing your optometry practice finances beyond the net income on your P&L and onto your actual cash flow.
If you aren’t confident that your current business accounting can give you that level of insight into your business, reach out to our team at Books & Benchmarks to learn how we can help.
