The Bottom Line Pharmacy Podcast – Tax Planning 2022
Purchasing assets is one way to reduce your tax burden. What are depreciable items that move the tax needle for pharmacies? Should you purchase equipment in 2022? What changes to depreciation tax laws are coming in 2023? On this episode of The Bottom Line Pharmacy Podcast, your hosts Bonnie Bond, CPA, Kendell Harris, CPA and Scotty Sykes, CPA, CFP® discuss answers to these questions and more.
The Bottom Line Pharmacy Podcast is your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.
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Scotty: Hey, everybody, welcome to the Sykes Bottom Line Pharmacy Podcast. Your hosts here, Scotty, Kendell, and Bonnie. We have a pretty hot topic here. We just finished the 10-17 tax individual deadline, thank goodness. Hopefully everyone out there got their tax returns done in time. And so here we are, now that we’ve passed that ’21 deadline, ’21 is behind us, we’ve got to start looking to 2022, guys, so–
Bonnie: Right into tax planning.
Scotty: Right, we always are looking at current-year planning, but definitely starting to ramp up now. Excuse me. And one of the hot topics we often hear about is depreciation, and write-offs, and things like that. So when we were at NCPA, a conference just a few weeks ago, guys, we talked to several vendors, Robotics RX, ScriptPro. Who are some other ones we may have talked to there?
Scotty: So there’s a few robot vendors out there, and those robots can get pretty pricey.
Bonnie: And even your smaller items, like icons, I mean, all of these things are… What’s really great that I heard at the show, Scotty and Kendell, that was different than 2021 at this point in time, is that they’re still saying they can get these things in use and in the pharmacies by the end of the year. So still a possibility for using these for a tax deduction, which is sort of what we’re talking about today, with depreciation.
Scotty: That’s right. So doesn’t seem to be any issues with supply chain, like it was in the prior year, with these robotics. Now when we think about robotics, we’re thinking about wage inflation, which is extraordinarily high right now relative to normal. I’m sure a lot of pharmacies, most pharmacies out there are feeling that, with the average, what, the NCPA Digest just came out with the average wage being $17 or $18 for a tech.
Bonnie: And that’s average, in some communities, towns, cities, it’s a lot more. And then, obviously, I’ve got lots of clients I work with that just have trouble keeping their pharmacy staffed as it is. Training, they’ll train, spend the time to do that, and then people leave. As with any other industry in the country these days, it seems like it’s just a hard thing to keep people working and to keep good staff, and so robotics may be the way to go.
Scotty: Robotics is definitely something to look at for sure, because once you get that robot in there, and it’s paid for, I believe they say, the numbers we’ve seen, it costs about $2.50 an hour to run a robot versus $17.44 for a tech, which is almost up a dollar year over year, almost up a dollar for a clerk, from $12 to almost $13 an hour. So wage inflation, efficiencies, and so on and so forth. So robotics is a hot topic right now. It’s going to continue to grow in pharmacy, has been for a while, but there’s always going to be that need there, especially with, again, the wage inflation that we are seeing.
Kendell: And I know some pharmacies I personally work with, they have a strong loyalty to the people that work within their pharmacy, rightfully so, but in this day and age, where there’s just a turnover, and a high turnover, with employees, that, not opportunity, but when that employee takes a job somewhere else, or they move, or whatever, it happens. I know I have a couple of pharmacists that I work with that they said, “Okay, I wouldn’t have gotten a robot to replace this person, but since they’ve moved on, this might be an opportunity to go ahead and get a robot in here instead of rehiring.” So that’s something to think about, if you’re in a situation where a tech leaves and you’re down one tech, that this might be an opportunity to get a robot in there.
Bonnie: Absolutely. And even if you have great staff, and you don’t have the turnover maybe. I know I’ve seen in a lot of situations where people are wearing many hats, as far as staff goes, and it just may make sense, for that staff member that’s doing great, to put them somewhere else to do something else in the pharmacy. Especially after we’re starting to see that, you know, we’re really seeing pharmacies benefit from branching out, doing many other things in the pharmacy, offering wellness, all these different things, instead of just script fills, there may be other places for that staff member and you can use the robot to do some of the other tasks.
Kendell: That’s a good point.
Scotty: That’s exactly what I was going to say, Bonnie, that you’re going to retool these individuals, if you can place robotics, or just efficiencies with automation and technology in general, replace that extra time with allowing the staff members in the pharmacy to focus in other areas of revenue growth in the pharmacy and cash-based revenue growth.
So just assuming, we’re going to be talking about technology here, and then what happens in a pharmacy, what happens when you look at purchasing a piece of technology such as a robot here. Typically you’re able to finance that over three or five years. Terms are pretty reasonable, that I’ve seen so far. And so you can spread out that cash-flow burden with the term of three or five years, which if it’s an actual purchase, you can write off that asset. So let’s just say it’s a $100,000 robot, you can write off that hundred-thousand dollars, in year one, using depreciation rules that are out there today.
Kendell: Yeah, so another story is someone saying, “Really, I don’t know if I have $150,000 to invest into a robot,” and then we run a tax plan and we see, and we show the person, “Okay, if you don’t have $150,000,” which many pharmacists don’t, most finance their robots, from my experience, let’s say you don’t buy the robot, come April, this is the check you’re going to have to write to the government, or you purchase the robot, and you spend considerably less per month, and you get to keep that extra cash in the pharmacy.
So then it was like a light-bulb moment. “So you mean to tell me that by purchasing a robot, I’ll have more cash in the pharmacy?” I’m like, “Exactly.” “All right, I need to go ahead and get that robot.” Not only do you get more cash, you get to free up the staff. And the way the client put it is, “My staff are now spoiled. They’re just so used to coming in and having stuff being filled and ready at the beginning of the day, they’re spoiled.” So it’s something to really think about, as far as how it can help your processes and your cash flow.
Bonnie: So guys, one question I get a lot from clients, let’s say they want to buy a robot for $150,000 and maybe they need it, for sure, and they’re not worried about the cash flow as much, but they’re looking at their financials and they’re showing that maybe they’re only showing income for the year of $50,000. So Scotty, can you still take benefit of the depreciation even if you’re going to create a loss with your purchase? That’s a question I get a lot.
Scotty: That is a good question, and you have two… So depreciation is a write-off of the asset over a period of time, and so there’s two areas of the tax law here where the Congress wants you to go ahead and expense all of it. So it’s going to be bonus depreciation and then Section 179, those are kind of common terms you hear out there.
The bonus depreciation and 179, very similar, allow up to a hundred-percent write off of the asset, this tax year, for 2022, but there’s some key differences. So the bonus depreciation will allow you to generally create losses. So you can write up, if you got $50,000 of income and you’ve bought a $150,000 robot, theoretically, you’ll be able to create a $100,000 loss in the pharmacy, apply that loss to other income you may have, and thereby, major tax-planning opportunity there.
Section 179 may be limited to not being able to do losses. There’s some exceptions to that, but 179 is a little limited. And then another key point to make here is the state differences. There’s a lot of different states that do not follow federal with these depreciation laws. So working with your advisors, your tax advisors here, is going to be important on determining, “Should I do bonus, should I do 179? “What are the differences? “What are the best course of action for me and my pharmacy?”
Kendell: Yeah, and that was a great overview, and I just wanted to just, you know, obviously, the pharmacists and the pharmacist owners are some of the smartest people in the world, so I assume a lot of them know about depreciation, but just to kind of give a little, very basic overview, in case someone is new to the business world and they have heard the term, basically, when you purchase a piece of equipment, depreciation is the wear and tear of that equipment over a certain amount of years. And the number of years isn’t actually dependent on how the equipment wears and tears; the IRS just prescribes a certain amount of years based on the class of asset.
So for example, if you get a piece of software, three years is automatically allocated, for equipment, such as computers, robots, and things of that nature, it’s five years, furniture in the office or fixtures is seven years, improvements to your buildings or facilities, 15 years, and then, actually, the building itself, 39 years, if it’s not a rental or something like that, if it’s a commercial building, it’s 39 years, non-residential. So these amount of years are just prescribed by the IRS. Automatically, when you get the equipment, whoever your advisor is or your tax preparer is should classify them properly so you get a portion of the deduction. And it’s not an equal portion every year, usually it’s kind of front-loaded, you get more at the beginning and then less at the ending years.
And what Scotty just brought out well was about the bonus depreciation and the 179. So that’s, instead of spreading it out, you get to kind of front-load it and get almost all, if not all of the depreciation in the first year, but obviously you’re foregoing the depreciation in later years. So that’s just kind of a high-level overview of what the depreciation rules are for the IRS. And as always, that’s the basic rules, but there’s so many exceptions to the rule, but that’s kind of the baseline overview.
Scotty: Yeah, depreciation is tricky. It can get a little tricky there, especially when we’re talking about vehicles. It seems like vehicles, you always have to look up vehicles, but vehicles, if you have a vehicle that’s over 6,000 pounds, gross vehicle weight, generally that’s eligible for bonus depreciation, hundred-percent write-off. So I tell folks, if you’re looking at a vehicle to add to the pharmacy, delivery vehicle. I mean the IRS, the Congress wants you to get an SUV, to get a truck, because you can write those things off hundred-percent, whereas vehicles under the 6,000 pounds, like a Prius, or a Ford Escape, or whatever, those are going to be limited as far as what you can write off. So there’s some planning that goes behind vehicles.
Obviously with vehicles, you want to make sure it’s over 50% business use. Any portion that’s not being business use, or that’s personal, I should say, should be handled accordingly and addressed with the employee or whomever. In other words, it’s generally going to be wages to that employee for personal use. So there’s some ins and outs you need to know about vehicles and personal use and things like that, but–
Bonnie: That’s definitely something we get a lot, people want to, “Hey, if I purchase my personal vehicle that I’m going to drive back and forth to the pharmacy, from home to the pharmacy,” and technically, with IRS rules, driving from your home to the pharmacy is not technically, that’s just like me driving to work.
Scotty: It’s convenient, yeah.
Bonnie: But if you leave there and then you’re making deliveries, that does count. So you just want to make sure that’s over the 50%. You definitely want to make sure if it’s a personal vehicle that you’re using for work some too, that you’re keeping good records of mileage and logs of what you’re doing, because it could get audited at some point and you want to be able to back that up.
Scotty: For sure. If you ever get pulled by an audit, the first thing that auditor’s going to say is, “Let me see your depreciation schedule,” which if you’re out there, if you’re a pharmacy owner out there, you need to overview your depreciation schedule.
Make sure it’s accurate and make sure it’s up-to-date, because in a lot of states, you’re paying property tax for what’s listed on your depreciation schedule, and if you’ve got assets on there that are no longer in use or disposed, you’re paying property tax you probably shouldn’t be. So overview that depreciation schedule, but the IRS is going to say, “Let me see that depreciation schedule. Oh, you have three vehicles, let me see the vehicle logs. Show me the documentation on how these vehicles are being used.”
And if you don’t have that, the IRS is going to, they’re going to be licking their chops saying, “Here we go, I got a good one here.” But if you’ve got that documentation in place, what is it going to do? That IRS is going to say, that auditor is going to be like, “Well, this client probably has their stuff buttoned up pretty good.” So just a little tip there on maintaining those records, which was a great point, Bonnie.
Kendell: Yeah, definitely, excellent point.
Bonnie: One of the things I wanted to mention too, because I do work with a lot of start-ups and a lot of transition pharmacies, pharmacies that are purchasing stores in an asset purchase, so the great benefit of doing that is even if you are purchasing the assets of a pharmacy that have already been depreciated, if you do an asset purchase, that is like you are purchasing that for the first time.
So the price that’s allocated to those assets, equipment, whatever that is, you can then begin in your new entity to depreciate those as well. So anybody looking at purchasing a store, know that that is one benefit of an asset purchase, is that you do get to use the depreciation methods that we have mentioned here as well. And also, we hear a lot about people wanting to remodel, guys, like, lots of, “Hey, is that something I can do?”
Scotty: The USP-800 remodels, things like that, yeah.
Bonnie: Yeah, so just keep in mind that, I know expanding buildings, so adding an addition and things like that, that is not going to qualify for a 15-year depreciation in bonus that we’re talking about here, but if you’re doing anything internally, so you’re just within the kind of inside, internal bones of that pharmacy, redoing the flooring, doing something to maybe the walls, or adding in an internal conference room, whatever, those things can be–
Scotty: Or a room to do, like, Botox and things like that.
Bonnie: Right, all these new things we’re hearing about, all these new programs that pharmacies are starting. That’s kind of an inside joke, but we do have some pharmacies starting to do Botox, just putting that out there. But those could be used for 15-year bonus depreciation too.
Scotty: They can, and an aggressive write-off. So, now, the bonus depreciation goes to 80% next year, so instead of being–
Kendell: Yeah, I think that’s the big thing, the big thing, yeah. Go ahead, I’m sorry.
Scotty: So, yeah, it’s a key time right now. If you’re going to get that hundred-percent bonus, now is the time, next year it’s going to go to 80. Assuming Congress doesn’t do anything, which Lord only knows, but as the law stands today. 179, I believe, is still going to be in place, and no changes there next year, but bonus will be a little different next year, so something to keep on the radar there.
Kendell: Something to plan for and run the numbers, for sure. Like, if you’re looking at person and equipment this year compared to next year, how is that going to impact you? Are you profitable? Do you take bonus, do you take 179? Depending on your profit for the future years, do you go ahead and take the regular maker’s depreciation or not? If you’re purchasing a vehicle, how many pounds? So it all sounds simple. And then you also got to look at how that’s all going to impact your personal tax return, depending on your income from other areas. So depreciation itself, it sounds pretty straightforward, but you definitely got to run the numbers, you got to take into consideration several different things. So it’s no quick answer when it comes to figuring something out with depreciation.
Scotty: No, it’s not.
Bonnie: We know that, because I can’t tell you guys how many times I’ve done a tax return, and you do it one way, and then you, “I’m not going to do 179, I’m going to do bonus,” and then you get through it and then you finally see the final numbers and you’re like, “Wait, this makes more sense to go the other way.” So it’s definitely, even from–
Kendell: Estate add backs too.
Bonnie: Oh, yeah, even from our perspective.
Scotty: It’s tricky. It’s not just a one-size-fit-all, you know, whatever, so definitely got to do some planning there. Now, talk about planning, one hot area is if you have buildings. And as Kendell mentioned earlier, you said commercial buildings, a 39-year write-off, I mean, come on, that’s crazy.
Scotty: Residential rentals are 27-year, 27-and-a-half-year. But just thinking about commercial buildings, if you own your pharmacy building, that’s 39 years, folks, that’s a long, long, long, long time. So what options you have there is what they call a cost segregation study. You can implement a cost segregation study even if you’ve already purchased the building and it’s been in use for several years. You can go back and recoup depreciation you may be entitled to, with a cost segregation study and you file the right forms with the IRS. But a cost segregation study is going to go into that building, some tax engineers are going to go into the building, they’re going to break down that building into individual components. And so instead of the whole building being 39 years, they’ll say, “Well, a bulk of the building’s 39 years, the structure and things like that, but the cabinetry, the electrical, the plumbing, the floors, et cetera, et cetera, et cetera, these all go into these smaller, shorter depreciable-life buckets, as Kendell, you mentioned earlier, three-year, five-year, 15-year. And those smaller buckets are eligible for this aggressive depreciation write-off, the 179, the bonus.
So you’re able to pick up a large portion of expensing pretty much in one-year, or two-year, or three-year of that building. So if you have a $500,000 building, $200,000 of it, let’s just say, would be 39-year, $300,000 of it, or a hundred thousand, we’ll just say is land or whatever, and that leaves $200,000 that is those 3-, 5-, 7-, 15-year bucket asset, the electrical, the plumbing, the floor, whatever. And you could be looking at a hundred-percent write-off right there–
Bonnie: First year.
Scotty: –of that first year. The cost of investment there is shrinking significantly.
Bonnie: Yeah, I’ve seen this huge benefit for lots of clients that have done this, even those that have done it for as early as when they were building their building, so a start-up. It has been just unbelievable to be able to have that detail and have those assets separated. And like you said, I mean, you don’t know what will even be going on in 40 years, so why not go ahead and take the advantage of these things in year one, five, seven?
Scotty: Oh, yeah.
Kendell: Yeah, that’s huge. And one thing I was just thinking about, so with all these nuances into depreciation, I’ll ask you guys a question. If I’m a pharmacy owner or a pharmacist and I look at my books and I look at the depreciation line, and it’s now October, and there’s been zero depreciation in my financials booked for the year, should I be concerned when it comes to figuring out my tax planning? If I’ve purchased things but there’s just nothing there for depreciation expense booked, would you be concerned when it comes to planning?
Bonnie: I wouldn’t be concerned. Now it could be someone that’s already been very aggressive with their depreciation in previous years and now they don’t have anything else to depreciate. But I’m a little conservative when it comes to it. I mean, I don’t think you should just go out and buy things for your business if you don’t need it. So if you get to the end of the year and you have some income, I don’t think you should just say, “Well, I’m going to go buy some piece of equipment,” if it’s not beneficial to you in some way. Now if there is a need, then it makes complete sense, if you’ve got the cash to do it or the ability to finance it and it makes sense for your business. Absolutely.
Scotty: Economics first.
Scotty: Economics first, taxes second, so, exactly. If I don’t see depreciation on there, Kendell, I’m going to be a little concerned, because I’m going to say, “Well, that’s odd, usually there’s depreciation,” and I’m going to say, “Well, what other areas are not being adjusted accordingly on these books?” So that’s going to raise a flag for me, and Bonnie, I’m sure it would for you as well.
Bonnie: Oh, yeah, I just mean, normally, you see maybe some more mature stores have accumulated depreciation, it’s all gone. Everything’s done.
Scotty: But it does raise a flag. You want to make sure those tax adjustments are getting on the books. And depreciation, that’s a good point too, depreciation… And let me just go ahead and add this in there, amortization is just like depreciation, it’s just expensing over a period of time, but amortization is intangible assets, like goodwill. If you purchase the script files of something, that’s amortized over 15 years. So depreciation and amortization are non-cash expenses, so when you’re looking at the bottom line of your income statement in your pharmacy, take into consideration these are non-cash expenses, generally speaking, they’re tax expenses, but it all flows into that cash flow and how you understand how that pharmacy is performing though.
Bonnie: I mean, the bottom line is you still have to pay for these things.
Scotty: You do.
Bonnie: A lot of people say, “Oh, I owe money, I’m going to go buy something.” Well, you still have to pay for it. I mean, obviously you’ve got to look at your tax rate and what it’s actually saving you for making that purchase.
Scotty: Speaking of cash flow, I’ve seen a lot of pharmacies, we get questions a lot about cash flow and pharmacy and how, “The bottom-line net income is not what’s in my bank account,” and so there’s three big keys to the cash flow in a pharmacy. One is a lot of your cash is tied up in receivables, money owed to the pharmacy. Another area where cash is sitting is on your shelf.
Bonnie: Inventory, yeah.
Scotty: And then the other area cash is going is either you’re taking it out of the pharmacy via distributions draws or you’re paying principle on debt. So those are four key areas, I think I said three to begin with, those are four key areas on understanding that cash flow, because cash in a pharmacy can get a little confusing, especially when you’ve got DIR fees in here and things like that. So I guess we’ll save that topic for another day, but–
Kendell: That’s another one, that’s another one, Scotty. You had to get it out there.
Scotty: I had to get off track there.
Kendell: So the bottom line–
Bonnie: On the next episode…
Kendell: So the bottom line–
Bonnie: So what’s your bottom line, Kendell, on depreciation?
Kendell: Mine is if you’re going to make a substantial purchase, it’s something that has planning involved, something that needs some planning. So talk to your tax advisor if you’re going to make a substantial purchase to see how it’s going to impact your bottom line.
Scotty: That’s a good one.
Bonnie: I kind of already gave mine. I kind of already gave mine. I think you don’t have to buy something just to buy something, but if you need to and it makes sense, economics, like you said, it’s a great opportunity to do so to save some money. Yep.
Scotty: So I got two bottom lines.
Bonnie: That’s kind of like a net income.
Scotty: First bottom line is going to be technology automation is critical in a pharmacy. It’s going to continue to grow in importance as your staff are pulled in other directions. So looking at these depreciation write-offs for this technology is very important in working with your advisors. And then the second thing is going to be that cost segregation study, which can be–
Bonnie: It’s big.
Scotty: –very material in terms of tax savings. But you absolutely have to work with your advisors with the cost segregation study and how to best handle that, because it could make sense, it could absolutely not make sense. So two key areas. I mean, depreciation is a great tool out there, but it’s not as easy as just 179, bonus, and those you hear all the time, so definitely some planning involved.
Bonnie: I wish it was, but it’s not.
Scotty: Well, like tax law, it’s never, ever easy.
Kendell: Job security.
Bonnie: We do, it definitely gives us some sort of feeling of security.
Scotty: They’re not making it any easier, that’s for sure. Well, that was pretty good, guys, I think we covered a lot there. Hopefully didn’t put anybody to sleep, and we didn’t get too technical, but if you have any questions or anything you want to pop in the comments, please do. We’re happy to take questions and maybe do a follow-up, but hope everybody has a great day out there, and happy tax planning 2022. Take care.
Kendell: Take care.