By Graham Garrison
Tax breaks are great. But before making an equipment purchase, one financial expert says physician practices should weigh utilization, cash flow, total costs and long-term financial return.
In today’s market, physician practices are operating with less room for error. Payroll, supplies, technology and other operating costs continue to put pressure on margins, while reimbursement does not always increase at the same pace, said Jonathan Raj principal and managing director of Hollins & Hur, a financial firm providing accounting, tax and financial advisory services specifically tailored to physician-owned medical practices and other healthcare businesses.
“That makes working capital more important,” he said. “Even a financially healthy practice has to think carefully about whether cash should go toward equipment, additional staff, expansion or simply maintaining flexibility in the business.”
Based on its experience working with solo physicians, group practices and specialty clinics, the firm sees firsthand how difficult it can be for practice owners to understand where revenue is going, which providers or services are truly profitable, and how rising staffing and operating costs affect the bottom line.
Look beyond the tax deduction
That broader financial perspective becomes especially important when practices are considering major capital investments, such as new equipment. While tax incentives can help offset the cost, Raj said practice owners should first determine whether the investment makes financial sense for the business.
Indeed, one of the biggest mistakes practices can make is “allowing the tax deduction to drive the purchase,” he said. A deduction reduces taxable income, Raj said, but “it does not reimburse the practice for what it spent.”
Practices also need to look beyond the equipment’s purchase price and consider the total cost of ownership, including installation, maintenance, software, supplies and potentially additional staffing. Raj says utilization is another critical consideration. “Equipment that makes sense at full capacity may look very different if patient volume comes in below expectations,” he said. In other words, practices should evaluate whether the equipment will generate enough clinical and financial value to justify the investment – not simply whether they can claim a tax benefit.
That same principle applies to Section 179, which allows qualifying businesses to accelerate the tax deduction for certain equipment rather than taking the deduction gradually through depreciation. Raj said a common misconception is that Section 179 “somehow makes the equipment free.” It does not. There are limitations, and the tax treatment can vary based on the practice and the purchase. “We generally look at the economics of the purchase first,” Raj said, “and then determine the most tax-efficient way to structure it.”
Start with the business case
Before focusing on the tax treatment of an equipment purchase, physician practices should determine whether the investment makes sense for the practice itself. Raj recommends physician practices evaluate purchases in a specific order: “operational need, expected financial return, cash-flow impact and then tax treatment.”
That means asking how much additional revenue the equipment can realistically generate, what additional costs will come with that revenue and, if the equipment replaces an existing process, how much cost or staff time it could save. Practices should also “pressure-test utilization,” Raj said. If patient volume or equipment utilization comes in 20% or 25% below expectations, does the investment still make financial sense? “Tax savings should improve the economics of a good investment,” he said, “not be the reason for making it.”
Timing matters
For practices considering an equipment purchase as part of year-end tax planning, understanding what qualifies – and when – is critical. Raj said most tangible equipment used in a medical practice can potentially qualify, including medical equipment, computers, office equipment and certain software, provided applicable IRS requirements are met.
One of the most important considerations is when the equipment is placed in service. “Ordering equipment, signing a contract or even paying for it before December 31 is not necessarily enough,” Raj said. Generally, the equipment must be ready and available for its intended business use during the tax year. As a result, practices considering an equipment purchase for tax purposes should plan ahead rather than assume a late-December purchase will qualify. “It is better to address it earlier in the fourth quarter,” Raj said.
Lease or purchase? Look at the long-term economics
The same focus on economics should guide practices when deciding whether to lease or purchase equipment. Raj recommends considering three factors: “how long you expect to use it, how certain you are about utilization and how important it is to preserve cash.”
For equipment a practice expects to use heavily for many years, purchasing may offer better long-term economics. Leasing, meanwhile, may provide greater flexibility when technology is changing quickly, utilization is uncertain or preserving cash is a priority. But practices shouldn’t make the decision based solely on the size of a monthly lease payment or the equipment’s purchase price. Instead, Raj recommends comparing the total economic cost of each option over the period the practice realistically expects to use the equipment.
Ultimately, the tax treatment should be part of the decision – not the decision itself. “The tax code can make a good equipment investment better,” Raj said, “but it generally cannot turn a bad investment into a good one.”
Key Takeaways
- Look beyond the tax benefit and evaluate an equipment purchase based on operational need, expected return, cash flow and total cost of ownership.
- Pressure-test utilization and financial assumptions to ensure an investment still makes sense if patient volume or equipment use falls below expectations.
- Plan ahead for year-end tax benefits, because equipment generally must be placed in service — not simply purchased or paid for — during the tax year to qualify.
- Compare leasing and purchasing based on long-term economics, including expected usage, technology changes, utilization certainty and the practice’s need to preserve cash.