Some Year-end Tax Planning Tips for Your Medical Practice
by James T. Krupienski, CPA, MSA, published in the November 2010 issue of Healthcare News
Thanksgiving is almost upon us and the holiday season is just around the corner. What better time than now to think about year-end tax planning for your practice, as well as yourself?
For those physicians who own their own practice, planning must take place at the practice and individual level. While professional corporations (PCs) are subject to a corporate tax rate of 35% of taxable income, S-corporations, sole proprietorships, limited liability companies and partnerships typically pass the burden of the tax to the individual owners of the practice. I will now focus on some of the strategies that can help to minimize some of that burden, focusing on cash-basis taxpayers.
There is no better way to show your appreciation toward employees for all of their hard work than a bonus at the holidays. Not only will it help to improve morale and keep them working hard into the New Year, but, if paid out before Dec. 31, it is a deductible expense and lowers your taxable income.
In terms of your own bonus, there are more items that should be considered. If you are an entity whereby the tax is paid at the individual level, a year-end bonus has no impact on taxes paid. Here, the consideration should be on the cash needs of the practice and owner. For PCs consideration would be given to cash flow needs, as well as the tax rates at the individual level as opposed to the 35% corporate tax rate.
Retirement Plan Contributions
Retirement-plan contributions are one of the most valuable tax -saving techniques that you can utilize. By making such a contribution, practices are able to reduce current taxes, while the individuals are able to defer taxes until they retire and take distributions. Another nice feature is that, except for employee deferrals, you have 2 1/2 months after year end to fund the contribution.
For 2010, the funding limit for standard defined contribution plans is $49,000. Those age 50 and above are able to contribute an additional $5,500, making the total $54,500. The current deferral limits for the year are $16,500, or $22,000 for those that are over age 50.
Medical and Office Equipment
For those practices that may have a few pieces of outdated equipment, or if there is that new machine you have been eyeing for some time, now may be the perfect time to make that purchase. The recently passed Small Business Jobs Act of 2010 contains some great provisions relative to the purchase of new medical and office equipment.
First, Section 179 has been extended and enhanced, allowing you to expense, not depreciate, up to $500,000 of qualifying equipment in the year it is purchased and placed into service. For those larger practices, be careful, because this expense allowance begins to phase out when purchases for the year are equal to $2 million. Additionally, the Small Business Jobs Act also revived the set-to-expire provisions of bonus depreciation, allowing for a 50% bonus depreciation allowance if the asset was placed into service before the end of the year. Finally, this act also creates a provision for certain real estate assets to be eligible for expensing, which is something that has not occurred in the past.
It should be noted that Section 179 expense provisions are only available to the extent that the practice has taxable income. If not, there are two options that are available. First, you could depreciate the asset and take advantage of the bonus depreciation that is allowed in the first year. The alternative is that you can elect to take the Section 179 expense and carry forward any unused amounts into future years. When making this decision, future tax rates and projected net income for future years should be considered.
Deferring Income and Accelerating Expenses
For those practices on the cash basis, this is also a time to review your revenues and other expenses. In terms of your revenue, income is reported as it is received. If this number is turning out to be much higher than expected, you may want to slow down a little on your collections toward the end of the year. Additionally, consideration should be given to your current and future tax brackets.
As a best practice, it is always recommended that you maintain enough cash to cover expenses, including payroll, for a two-week period. In order to do so, a listing would need to be created of what is coming due. If income appears higher than you would like to report, consider paying some of those upcoming bills before the end of the year. Not only will it help to lower taxable income, but it will also not hurt the practice from a cash perspective, since the payment was due regardless. Some expenses that are common when employing such an approach include, but are not limited to, malpractice insurance, rent, and office supplies.
Tax planning can be a difficult and complicated process, with many items that may surprise you. Unfortunately, these surprises typically surface when it is too late. For that reason, it is always recommended that you meet with your CPA to run projections of what your anticipated tax liability will be.
When running these projections, your CPA will help you to identify any potential non-deductible items that may have been overlooked. These include, but are not limited to Key Person life insurance, disability buyout insurance, charitable contributions, penalties and 50% of your meals and entertainment. Another item that is overlooked in many instances is the impact of the alternative minimum tax. Certain items, such as the timing of the payment of your estimated state taxes, can lead to an unpleasant surprise when it comes to this tax.
In addition to planning for surprises for a tax balance that may be due, you should ensure that penalties for the underpayment of taxes, which can be substantial, are also avoided. These penalties can generally be avoided by timely paying in through withholdings and estimated taxes a) 90% of the tax due on your current year tax return, b) 100% of the tax due on your prior year tax return or c), for those individuals whose adjusted gross income exceeds $150,000 ($75,000 married sep), paying 110% of the tax due on your prior year tax return.
In conclusion, the goal of tax planning is to minimize the tax burden of your practice. Doing so in a proper manner can do so much more for you and your practice.
It also considers the needs for cash in your organization, the morale of your employees, need for equipment and other capital purchases, and your future retirement.
These items should be taken seriously and discussed with your CPA to avoid any surprises as April 15 rolls around.
James T. Krupienski, CPA, is a manager with Meyers Brothers Kalicka, P.C., Certified Public Accountants and Business Strategists, in Holyoke; (413) 536-8510; www.mbkcpa.com
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.