Are you among the practices that executed year-end additions of equipment & software to take advantage of the tax benefits for capital investments under Section 179? This article identifies 6 areas practices should evaluate to ensure strategic effectiveness and maximize the ROI of this investment.
What is Section 179?
Section 179 of the Internal Revenue Code allows businesses to take an immediate deduction for business expenses related to depreciable assets such as equipment, vehicles, and software. This allows businesses to lower their current year tax liability rather than capitalizing an asset and depreciating it over time in future tax years. Although there are maximum deductions and property values under the code (for tax year 2022 the maximum deduction was $1,080,000 on a value of property purchased at $2.7 million), Section 179 is a remarkable opportunity for independent optometrists to receive significant tax benefits for the year.
Capital investment & your bottom line
Many expenses on the income statement can be adjusted with ease, such as COGS, payroll, & marketing. Unless paid in cash, capital investment in equipment & software is a long-term obligation. That said, these investments must enhance the bottom-line, boosting cash flow more than the next best use of funds (opportunity cost). Thoroughly evaluating these 6 areas will ensure your year-end capital investment will benefit your practice long-term:
Practice vision and understanding where the practice stands in its life cycle are critical to optimize capital investment in equipment and technology. As such it is important to consider practice goals and time horizons in the decision. For practices looking to grow, adding equipment and technology is an excellent way to differentiate the business and drive sustainable growth in the short & long-term. Alternatively, for practices looking to sell, it is important to consider the impact of the new investment on the practice valuation, realizing this will have different implications depending on the time horizon the owner is operating on.
Utilization is another key consideration when investing in equipment and software. Start by listing all of the conditions the instrument can benefit along with diagnostic codes. Next, execute a query of your EHR or your analytics software to determine existing patient volume of those diagnostic codes, and determine the frequency of the procedure on each patient. Be sure to include patients without billable diagnosis conversions who may be candidates for direct pay services. Similarly, when evaluating investment in a software solution, consider the practice & patient experience, and the frequency of current workflows, to quantify the potential benefit of the SaaS or technology workflow.
Managed care is the largest revenue channel for many practices, therefore evaluating reimbursement levels for the services rendered utilizing equipment and software is another critical area in need of exploration. To determine this, identify the top managed care payors in the practice and evaluate what they pay for the target procedure codes. This analysis can inform the projected return on investment of the equipment and determine appropriate out of pocket fees for direct pay. (On a separate note, for those intent on eliminating a managed care plan, this exercise is the first step of the process!)
Capital investment in equipment and technology will impact cash reserves. Therefore, it is vital to determine your targeted cash on hand and understand how the equipment costs will impact that in the short and long term. Conducting a financial forecast & feasibility analysis of the addition will provide insight into these. Further, when a lump sum payment will be made it is important to project how long it will take to replenish cash on hand. This too will change in time as the new investment gains traction, driving top-line revenue growth and delivering economies of scale as you adopt new procedures and workflows, and increase efficiencies.
5. Financial Details of a Capital Investment
You must investigate the full financial details of an equipment & software purchase to determining financial feasibility. Start by acquiring all financial details for purchasing the equipment versus leasing. When assessing these details, be sure to factor maintenance and repair costs associated with the purchase as well as other hidden costs including shipping, IT/networking, insurance, and service contracts. Also inquire about any manufacturer promotions and negotiated pricing you may have access to through affiliations. (Don’t overlook negotiating independently, you may be surprised by what you can secure!) Lastly, assess the labor costs associated with the new equipment or software, particularly quantifying the time spent training, conducting the procedure or utilizing the software, as well as time needed for record keeping & administrative functions.
An effective marketing strategy is necessary to drive utilization of newly added equipment and software. The key to any successful marketing plan rests on the alignment of consistent communications at all patient touch points, both externally and internally. External marketing tactics engage and attract patients (& prospective patients!) outside of the office. Most of that is centered around your digital presence: practice website, social media, and targeted engagement campaigns. Conversely, the internal aspects of your marketing strategy pertain to in-office experience: point-of-sale literature, promotion & signage, and team alignment on all patient communication leveraging appropriate language and the patient flow through the practice. A strategic omnichannel marketing plan for newly added equipment and software helps ensure the short- & long-term success of the investment.
If you have invested in equipment or software for tax benefits under Section 179, evaluating practice lifecycle, projected utilization, reimbursements, budget, financial details, and marketing plan around the addition will ensure a sustainable return on investment— far exceeding a single-year tax deduction!