While the summer months are typically synonymous with vacations, this is also the halfway point of the calendar year, and by now, most practices should have a decent feel for how the year is going financially. An up-to-date profit and loss statement with a balance sheet and cash flow statement, along with other important financial data, should be reviewed and compared to budgeted information. If the financial statements are not perceived as valuable, then the practice accountant should explain them further in order to more fully understand the financial health of the practice and the tax ramifications. With this year-to-date information in hand, it is time to start focusing on tax planning.
Christopher Davis, CPA
Jim Rice, CPA
Barring an act of Congress (there’s a joke in there somewhere), we know precisely the tools in our tax planning tool belt for 2019. We know what the tax rates will be, and thanks to the Tax Cuts and Jobs Act (TCJA), we know that many of the pro-business changes made to the tax law will be around for a few more years. The biggest change to the tax law came in the form of the new qualified business income deduction (QBID) available to the owner(s) of entities organized as a partnership, S corporation or disregarded entity. By now, you probably understand that physicians are eligible to take the full QBID on their share of business income only if their total income is under $321,400 for filers who are married filing jointly or $160,700 for single filers. If your total income for the year is flirting with these levels, further review of your financial picture is merited to see if you can make the most out of your business deductions with the idea being to reduce your income numbers below these thresholds to utilize the QBID.
One routinely used source of business deduction comes in the form of accelerated depreciation from the purchase of business assets. For 2019, the TCJA increased the amount of the Section 179 expense to $1,020,000. Section 179 allows, for federal income tax purposes, the election to immediately expense 100% of the acquisition cost of business assets, such as equipment, computers and office furniture, purchased and placed into service during the year. In addition to the expanded Section 179 expense, the TCJA made changes to the “bonus” depreciation provision for 2019 to allow for the immediate 100% expensing of qualified assets. While both types of accelerated depreciation may seem like they get you to the same place, Section 179 and “Bonus” depreciation have a few distinct differences that may impact your overall tax picture and should be discussed with your tax adviser before being utilized.
Now is a great time to review your business’ current retirement plan to determine if this is working hard enough for you and your employees. Plans like 401(k)s and traditional IRAs are a great way to offer tax-deferred retirement planning for your business. There are also more aggressive plans, such as a simplified employee pension (SEP) or a cross-tested profit sharing plan, that may allow for larger tax-deductible contributions to be made for the benefit of key owners and employees.
Physicians don’t want any more complexity than they already have. But now is a good time to reassess the need to separate different locations and services for better asset protection, to more easily identify loss centers and to facilitate bringing in additional owners at certain locations. Likewise, it may be the time to review the choice of taxable entity that the practice reports under. The PLLC, professional limited liability company, is a popular choice of entity, but is it being utilized in the right way for income tax and self-employment tax (Medicare and Social Security) reduction? Many physicians are paying large amounts in Medicare and Social Security taxes which, with proper planning, could be reduced.
On the personal side of things, keep in mind that the TCJA capped the deduction for property and sales tax to $10,000 per year. There were also changes made to the mortgage interest deduction. Under the old laws, mortgage interest was deductible on acquisition indebtedness of up to $1 million. Under the TCJA this has been reduced to $750,000 of acquisition indebtedness on loans originating after Dec. 15, 2017. Also, interest paid on home equity lines of credit is deductible only to the extent the loan was used for the improvement of your home. To be clear, mortgages that originated prior to Dec. 15, 2017, are grandfathered under the old rules. The home equity loan rules apply to loans that originated before and after the TCJA changes.
Other items to review during the summer include your level of federal income tax withholding and estimated tax payments. As a result of the TCJA, many taxpayers struggled with having enough federal tax withheld from their salary in 2018 and making quarterly estimated tax payments to cover the taxes. What about any life changes for this year? Marriages and the gift of children can significantly change your tax picture and possibly provide other planning opportunities. Now is also the time to take a look at your current compensation, including maximizing contributions to a retirement plan, and don’t forget about your investment portfolio. If facing large capital gains tax exposure from appreciated investments, you can plan ahead to gift the appreciated investments to charity to avoid the capital gains tax and receive a charitable deduction in the process or work with your financial adviser to sell some of the underperformers to offset the gains.
In summary, it’s never too soon to start tax planning. In addition to the items discussed in this article, there are numerous opportunities for both individuals and businesses to take advantage of. We recommend giving your team of advisers a call to discuss what could be done to reduce your 2019 taxes.
Christopher Davis, CPA, is a Senior Manager with Sol Schwartz & Associates PC and has been practicing public accounting since 2008. Davis practices in various areas of public accounting, including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. He is a member of the firm’s Healthcare niche that specializes in identifying and implementing solutions to achieve the goals of the physician clientele we serve. You can contact Davis at email@example.com or 210-384-8000, ext. 118
Jim Rice, CPA, is a shareholder at Sol Schwartz & Associates PC. He has 39 years of experience in public accounting. In addition to providing business consultation, financial planning and various other accounting services, Rice specializes in income tax planning and consultation. He works with a high concentration of physician practices and high-net-worth individuals. Contact Rice at firstname.lastname@example.org or 210-384-8000, ext. 112.