Medical Equipment Depreciation Overview
Medical equipment depreciation is a key tax deduction for physicians. This deduction allows medical practices to deduct a portion of the cost of their equipment annually over each asset’s useful life. Applying the correct depreciation rate is crucial for accurate tax reporting.
The IRS allows medical professionals to depreciate medical equipment using one of several different methods. A tax professional can explain the best way to calculate your medical equipment depreciation rate for maximum savings in the early years of your business.
What Is the Depreciation Rate for Medical Equipment?
The depreciation rate for medical equipment depends on the depreciation method you use and the nature of the medical equipment. The rate at which you depreciate your medical equipment is contingent on its useful life.
Estimating each asset’s useful life can be complex. The IRS provides guidelines on the useful life of specific kinds of equipment. However, you may need to follow industry guidelines to calculate the useful life of asset types that are not clearly listed in IRS guides.
Factors That Affect Medical Equipment Depreciation Rates
IRS Publication 946 explains depreciation rates and the methods you can use to calculate the annual depreciation of your medical equipment. The following factors also impact how quickly certain items depreciate:
Type of equipment: Different types of medical equipment have varying lengths of useful life. For example, high-tech imaging equipment may have a shorter useful life than general medical furniture.
Equipment usage: The frequency and intensity of use can affect the rate of depreciation. Equipment used heavily or in demanding environments may depreciate faster because it will need to be replaced more often.
Technological advancements: Rapid advancements in medical technology can render older equipment obsolete before it reaches the end of its physical life.
Depreciation can get complex. That’s why healthcare professionals often choose to outsource this task to an agency that specializes in accounting for medical practices.
Depreciation vs Regular Tax Deductions
Depreciation is one of several tax deductions for physicians that can be used to optimize their tax return and increase cash flow. Depreciation and regular business expense deductions both reduce taxable income but are calculated differently.
For example, medical practices can immediately write off business expenses that are classed as ordinary and necessary. These include PPE equipment like face masks, gloves, and gowns as well as regular expenses like stationary, rent, utilities, staff wages, and maintenance costs.
Depreciation covers equipment and other kinds of capital assets that benefit a medical practice for more than one year and lose their value over time. These assets are capitalized and written off over a set number of years. Assets that are typically depreciated include commercial buildings, computers, large medical equipment like X-ray machines or scanners, furniture that costs more than the de minimis safe harbor (usually between $2,500 and $5,000 per item), and business vehicles.
How to Calculate Medical Equipment Depreciation
The formula for calculating medical equipment depreciation depends on whether you use the General Depreciation System, Alternative Depreciation System, or another depreciation method.
General Depreciation System (GDS)
The General Depreciation System (GDS) is the most common way to depreciate business assets. Medical practices can choose one of two systems within GDS to depreciate their medical equipment: the Straight-Line Method or the Declining (or Double Declining) Balance Method. A tax professional can help you calculate depreciation expense using the most optimal method for your practice.
The easiest way to calculate equipment depreciation is using the straight-line method. To use this method, you will need each item’s original cost and salvage value. Salvage value means the estimated value of the equipment at the end of its useful life.
The formula used to calculate annual equipment depreciation using the straight-line method is:
(Asset Cost - Estimated Salvage Value) / Useful Life = Yearly Depreciation Deduction
Example: Let's imagine your medical practice bought a scanner for $10,000 this year. Its salvage value is $2,000 with a useful life of five years. In this case, we'd calculate:
($10,000 - $2,000) / 5 years = $1,600 per year
In other words, your equipment would lose $1,600 of value each year until it reaches the estimated salvage value at the end of its useful life. The scanner’s book value over this period is then calculated as its original cost minus accumulated depreciation, i.e. $10,000 - ($1,600 x years elapsed).
A tax professional can assess your medical practice’s financial situation to determine whether GDS is the most tax-favorable option. Some businesses benefit from using the Alternative Depreciation System (described below) or by claiming a larger deduction upfront using Section 179 or bonus depreciation.
Alternative Depreciation System (ADS)
The Alternative Depreciation System is a method that extends the number of years over which a medical practice depreciates an asset. For example, the high technology medical equipment ADS recovery period is five years (see the section entitled “Recovery Periods Under ADS” in Publication 946). Some businesses opt for this method as it means their taxable income is reduced over a longer period.
Use the following formula to calculate depreciation using the ADS:
(Cost of Asset - Salvage Value) / ADS recovery period
Other Depreciation Methods
The following depreciation methods may enable you to deduct a greater percentage of the cost of certain pieces of medical equipment near the beginning of their useful life.
Section 179
Section 179 allows businesses to deduct the entire cost of certain assets the year they’re placed in service. This means that medical practices can apply an expense deduction for some of the assets they purchase rather than capitalizing them and depreciating them over time.
Section 179 applies to tangible property like equipment and qualified real property, which includes HVAC, improvements to roofs, fire alarm systems, and security systems installed in nonresidential real property. The maximum deduction is $1,220,000 for the 2024 tax year.
The main advantage of applying Section 179 is that it offers immediate tax savings for new businesses with limited cash flow.
Bonus Depreciation
Bonus depreciation is another incentive that allows medical practices to deduct a larger portion of the cost of medical equipment in the year the equipment is placed in service. Bonus depreciation is an especially helpful option for medical practices that need to maximize cash flow in their first year. Ask your tax professional if bonus depreciation applies to your assets and whether it’s a tax-favorable option for your business.
Optimize Depreciation Rates to Boost Your Bottom Line
Calculating equipment depreciation is much more complex than simply determining an item's depreciation rate. Details like the cost basis and estimated salvage value of each piece of equipment are also vital to calculating depreciation correctly.
Setting up a medical practice involves high initial costs due to heavy investments in medical equipment. That’s why it’s essential to work with a tax professional who can help you minimize your tax liability and maximize the amount you have available to reinvest in your business.
