5 Tax Tips Physicians May Overlook
Everyone knows that death and taxes are issues in life that are unavoidable. While doctors may be great at prolonging the lives of their patients, experts say they may be missing some important details about taxes when it comes to their urgent care business. With the April 15 tax deadline looming around the corner for most ASC and UCC physicians, The Ambulatory M&A Advisor has teamed up with top CPAs to dig deep into the importance of deductions, retirement plans, real estate, continued medical education and dependent care credits when working on your tax return as a physician.
Katherine Watts, partner in charge, Health Care services with HORNE CPAs and Business Advisors says generally, on the business side of deductions, anything that is an ordinary and necessary business expense is generally deductible from the business. On the personal side, if the physician is not self- employed and is the employee of a corporation, Watts says there are options available to them. According to Watts, if the employee has not been reimbursed for business expenses like continued medical education (CME) travel, dues, or anything similar, there is a place to deduct that as a miscellaneous itemized deduction on their taxes. Watts does warn there is a floor; and whether the deduction would be beneficial or not, one would have to go through the whole calculation with the floor of the itemized deduction.
Zandra O’Keefe, CBIZ, MHM, LLC, Managing Director says that for an employee filing a W-2 the deductions would not benefit you if business expenses are not above two percent of your adjusted gross income.
O’Keefe says the possibilities of deductions are based on the situation of the individual and the structure of their business entity. In an example, she speaks of people attempting to write off their mileage on their taxes.
“For a sole practitioner filing a Schedule C, it’s pretty easy for them to look and see if they have business use of their car. That is one of the most audited things. So you need to make sure that you have you records, and they do have to be written. If you have a calendar that you are keeping with your business use, great. You can track that mileage and put it there,” O’Keefe says. “If you had business use of a car and tried to put it on a personal return because you get a W2, you’re not likely going to get benefit when filing form 2106…you’d have to have a boatload of miles to even get a benefit.”
O’Keefe says when a physician is in a W-2 situation, negotiating up front before signing the employment agreement about business expenses is key, because the business can deduct them, but an individual is not going to get benefit.
2. Retirement and Taxes
Matt Shonsey, CPA with Shonsey and Associates, a business that specializes primarily in tax and accounting consulting services to medical practices says that most physicians are missing out on the taxs breaks that can apply simply by implementing a proper retirement plan in their business.
“I don’t think a lot of practitioners today really put their emphasis enough into this area. When we see a physician and we say they can do better with what they are putting away in terms of retirement plan options, they go ‘But my employee cost will go up,’” Shonsey says.
He adds that there are several opportunities today with the way 401k profit sharing plans work and the way they are designed. Shonsey says that some retirement plan options that physicians can choose from include cross-testing, age weighted plans, and the cash balance plan.
“All of these plans give people with the higher income levels like physicians, the opportunity to not only design a plan that would give them more dollars put away, than what they might be accustomed to, but also without not having a lot of additional employee cost if they get designed correctly,” Shonsey says.
Watts says at the business level, it is advised for an owner to have a 401K and/or profit sharing plan, and there are several options to select from. She adds that owners do have to cover their employees and there are several discrimination rules to comply with.
“My best advice would be to have somebody run an analysis. Look at your employees, look at your personal situation and see which profit sharing plan would be the most cost effective,” Watts says, adding a benefit plan consultant or an attorney would be the best individual to approach for this process.
3. Real Estate
O’Keefe says in real estate there are new tangible property regulations that have been implemented.
“Really, I think there can be benefits for ASCs and physicians that own their own buildings. If they didn’t get a cost and segregation study prepared, they will want to want to get one now,” O’Keefe says.
She further explains that a segregation study involves segregating the cost of a building and breaking it off into units of property to help optimize the timing of deductions.
“For example, you have to replace the elevator shaft unit of property. If you make a special election within the return and you have a cost and segregation study to substantiate the cost of that shaft unit of property is, let’s say its $20,000 of the original building. When you replace that component of the building, you are able to deduct that cost attributable to it if you have a cost segregation study and you make the special elections. If not, you have to continue to depreciate that because it was part of the original building. Depreciation is 39 years for a regular commercial building. That means it takes 39 years to deduct it,” O’Keefe says.
O’Keefe says that when an accountant helps break the property up into units, looking for shorter life assets, this will potentially give some accelerated deductions.
Shonsey adds that real estate does in fact create many opportunities for owners of office buildings. He says that in physician cases, medical equipment is added into the same category due to the high expense of certain pieces.
“We usually like to see those types of ownership of the equipment and real estate in a separate entity because it provides a little more flexibility, not only in terms of possibly saving some Medicare tax that would be necessary to pull money out of a practice, but it also creates what we call a lot of income shifting opportunities with family members if it’s set up and designed correctly,” Shonsey says.
Shonsey also agrees that real estate ownership today, has a lot of opportunities when set up on a depreciation schedule using cost segregation opportunities. He says that some of the shorter life areas physicians should look out for in this segregation plan includes parking lots, signage, landscaping.
CME can either make or break a tax deduction attempt. Shonsey says there are credits out there; however, most will have been phased out due to the higher income of most physicians. He says that ongoing travel and continuing medical education that most physicians take advantage of, would qualify for deductions on their normal practice expense.
O’Keefe goes on to break down CMEs by specific situations.
“If you’re a W-2 employee, ask your employer to reimburse you. Oftentimes, an employment contract will stipulate that CME will get paid at a certain dollar value,” She says. “If you own the practice, that’s a practice expense, you can definitely deduct that.”
Watts says in this case, meals and entertainment are limited to a 50 percent deduction for both individuals and businesses.
“You want to have all of your receipts and document what it was for and for what business purpose,” Watts says.
Both O’Keefe and Watts warn against physicians going wild and taking their family on a CME trip, then attempting to deduct the family’s personal expenses on their return.
“Don’t try to go crazy. My old tax professor said, “Pigs get fat, and hogs get slaughtered”. When the IRS comes to look at that $25,000-$50,000 dollar CME, they are going to disallow that for the spouses and family that don’t legitimately work for the practice,” O’Keefe warns.
5. Dependent Care Credits
Watts says dependent care usually comes into place when both spouses have to work or are full-time students.
“You show your dependent care expenses, for example, after school care or a nanny to take care of your children, etc,” Watts says. “You show those expenses, you show how many dependents were taken care of.” Watts says this can produce a credit, but like in other situations there is a maximum amount allowed.
O’Keefe says “If you have a stay at home spouse, it’s really not intended for that situation. Dependent care is really intended to help dual income families.”
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