I know you’re thinking to yourself: “the year-end is still pretty far away…” Speaking from experience, this is a great time of year to review how your year is shaping up and what can be done to avoid larger than necessary tax bills. With that in mind, this article will discuss a few tax planning ideas as you start thinking year-end.
One of the most significant items for year-end planning continues to be the immediate expensing of fixed assets (machinery, equipment, computers and furniture, for example) that are both acquired and placed into service by the end of the year.
If the practice has net profit, you are allowed to expense up to $510,000 of qualifying fixed assets to the extent that the deduction does not create a loss. If the business is operating at a loss for the year, there are still opportunities to expense 50 percent of the cost of new (not used) equipment purchased and placed into service during the year. This planning point is especially helpful when the expenditure has already been planned and budgeted for and can be implemented before the end of the year. It’s worth pointing out that fixed asset purchases financed with loans will also qualify for the provisions as outlined above. In tandem with this idea is accelerating fixed expenses (rent, for example) into the current year. An example of this is paying the January rent in December to get the deduction in the current year. Expenses paid with a credit card also represent a deduction in the current year, even if the credit card is not paid off until the following year.
Current IRS rules allow for the expensing of up to $2,500 per item, per invoice, on fixed assets or repairs and improvements on your office. An example of this: you purchase 10 iPads at $1,000 each for a total of $10,000. Historically, this cost would have been capitalized and depreciated over several years. As currently allowed, the $10,000 would be a small equipment purchase eligible to be expensed without consideration of the provisions discussed previously. The same idea holds for repairs and improvements on your office. A properly executed document on this policy of expensing $2,500 per item should be maintained in the company files.
Retirement planning can be a great tax savings tool as well. If your practice does not have a retirement plan in place, several options are available to start putting tax-deductible money away for retirement. The type of plan chosen will determine the amount of allowable employee and employer contributions. Some types of retirement plans allow for larger amounts of tax-deductible employer contributions to be made for benefit of a practice’s key employees. These types of plans can offer tremendous tax savings for the owner/employee of a practice. Keep in mind that many types of plans also allow for employer deductible contributions to be made after the year-end. Typically, these employer contributions are due by the filing of the practice’s tax return. Maximizing your personal retirement plan contribution as an employee can forego incurring top bracket income tax on those wages as well.
For personal income taxes, often-overlooked deductions include sales tax paid on large purchases (cars, boats, etc.), donation of non-cash items to charity, and the availability of tax credits from the purchase of energy efficient appliances or improvements made to the home. Many physicians incur alternative minimum tax (AMT) as a result of their income level. Deferring compensation into the next year, if possible, could be a way to keep your income below the AMT levels. Additionally, the grouping of deductions in alternating years such as real estate property taxes can assist in avoiding additional AMT. A change in marital status during the year can play a big role in determining your income tax bracket. Your anticipated income tax bracket should be reviewed before the end of the year to ensure that the current level of federal income tax withholding or estimated tax payments being made are sufficient.
In summary, taking advantage of tax planning ideas like the ones discussed in this article before the year-end can lead to tax savings. A careful analysis of your particular tax situation should be done before you pursue any year-end strategy to reduce income taxes, and yes, the business related holiday party is tax deductible.
Christopher Davis, CPA, is a 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 via email at firstname.lastname@example.org or 210-384-8000, ext. 118.