Before any tax planning can be properly performed, physicians must have a good understanding of the year-to-date net income for both their medical practice and their personal taxes. This requires having timely financial statements for the medical practice and knowing the estimated taxable income and projected tax liability for their personal situation.
Having said that, let’s look at some tax planning moves to consider.
- Many medical practices have a 401(k) company retirement plan.
This is a good start but tends to fall very short of actually providing decent retirement funding for the key employees. The 401(k) plan can be modified with provisions that increase the company funding for key employees without increasing proportionately company funding for the rank and file employees. However, these provisions and new, more aggressive retirement plans must be implemented soon. That implementation can be as simple as signing new retirement plan documents. The provisions I refer to also do not require mandatory funding of the retirement plan each year. Each year stands on its own as to whether the physicians want to fund the retirement plan for the current year.
- Quite often, there are business expenses that end up being paid by the physician personally with no reimbursement by the medical practice.
One of the major tax cut changes was to disallow individuals from taking deductions related to unreimbursed business expenses. These expenses should be captured and paid by the medical practice. Doing this creates deductions for the practice with the physician being reimbursed on a nontaxable basis, as the physician is simply reimbursed for business expenses. The physician must provide written documentation. Examples of these types of expenses could include:
- An office in the home of the physician, especially if substantial office administrative procedures/functions are done at the home. The reimbursement would consider expenses incurred to maintain the house and household.
- Mileage by the physician to meet with his/her advisors, such as the CPA, attorney or other medical professionals. Any travel that benefits the medical practice should be reimbursed, including business entertainment miles.
- Reimbursement of items like board exam fees, continuing medical education and medical association dues.
- If the children of the physician have done some work that benefited the medical practice, then those children should be paid a salary for their work, even if the salary is late in arriving.
If the work of the children is justified, the salary could be several thousand dollars without there being any income tax to the children while still being a deduction for the medical practice. With those salaries, Roth IRA accounts up to $6,000 (if salaries are $6,000 or more) could be funded for the children.
- Often times, the medical practice has on its books an expensive car that is being written off over a much extended period of time.
This makes for the car having a high tax basis but a much lower market value. If the physician is so inclined to dispose of this car in favor of another car, then the physician should carefully think about selling the current car. This would allow for a large deduction on the loss of the sale of a business asset.
- If the physician does not currently have a large regular IRA account balance, then the physician should consider funding a nondeductible IRA account and then immediately rolling over that nondeductible IRA account into a Roth IRA account.
This process allows the Roth IRA account to grow on a tax-free basis with the future withdrawals not being taxable at all. There are requirements as to how long the Roth IRA account must be held. This funding of the nondeductible IRA account does not create a tax deduction, so it is not necessarily a tax planning move. However, it is usually at this time of the year that physicians think about tax planning moves.
- With stock market investments, there may be capital losses available to trigger so as to eliminate already-incurred capital gains and capital gains distributions from stock holdings.
- Acquisitions of business depreciable assets and software, if needed, should always be considered.
It’s worth pointing out that fixed asset purchases financed with loans will also qualify. In tandem with this idea is accelerating payment of fixed expenses (rent, supplies,insurances, utilities) 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. The issue of whether to accelerate deductions into this year or push them into next year is based on an understanding of your current taxable income situation. This point cannot be overstated.
- Finally, it is just as important to review the current tax reporting structure for your medical practice.
If the practice is reporting to the IRS other than as an “S” corporation, there should be an analysis of the merits of converting the tax status to an “S” corporation. This idea does not ordinarily apply to medical practices that operate as partnerships with each physician as his/her own separate tax reporting entity. There are certainly tax-planning ideas with this structure as well.
Bottom line: Be sure to meet with your CPA soon.
Jim Rice, CPA
Jim Rice, CPA, is a shareholder at Sol Schwartz & Associates PC. He has 42 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 210-384-8000, ext. 112, or by email at email@example.com.
Kimberley Briones, CPA, is a Senior Tax Associate with Sol Schwartz & Associates PC. She enjoys helping individuals and healthcare organizations with tax compliance and planning issues. She earned a Master of Healthcare Administration and is passionate about both healthcare and accounting. Contact Briones at 210-384-8000, ext 157, or by email at firstname.lastname@example.org.