For more on this topic, go to www.dentaleconomics.com and search using the following key words: taxes, tax planning, tax return, tax burden, retirement account, John K. McGill.
With less than a month to April 15, is there anything that can be done to reduce your 2009 tax burden? Yes, and big savings are possible, says Bo Elliot, CPA, of Elliott Davis. Some will require cash, while others are the result of proper accounting.
First, let's look at your practice. Did you purchase any equipment in 2009? If so, are you depreciating it rather than electing to use Section 179 to expense the full cost in 2009? You can write off up to $250,000 of new or used equipment purchased in 2009.
Did you pay expenses on behalf of the practice but failed to reimburse yourself during the year? Review your personal records, looking for travel, meals, entertainment, auto expenses, subscriptions, dues, professional fees, or consulting fees. Record these items as capital contributions to the practice and as 2009 expenses for the practice.
Have your bookkeeper analyze your meals and entertainment account. Segregate all charges for travel, lodging, continuing education, and staff meals from entertainment. The former is 100% deductible, while the latter gets only a 50% deduction. Entertainment includes meals, golf fees, event tickets, and similar items for the benefit of referral sources and other professional relationships.
Did you let 2009 pass without establishing a retirement account? All is not yet lost. You have until you file your return to establish and fund a SEP–IRA. You can contribute up to 25% of wages for you and your employees up to a maximum of $49,000 per person. The contribution rules are slightly different for self–employed doctors, but the maximum contribution remains at $49,000.
If your spouse has a separate, independent business, then the ideas above will apply to that business as well. The ability to establish a second retirement plan is a great tax saver. The two plans do not have to be the same type.
Many doctors own the building that houses their practice, either personally or in an LLC. Because of debt service and depreciation, the real estate will have tax–deductible losses in early years.
These two activities can be grouped together to constitute an appropriate economic unit if ...
- The rental activity is insubstantial in relation to the business activity
- The business activity is insubstantial to the rental activity
- Each owner has the same proportionate ownership interest in the rental activity, in which case the portion that involves the rental of property items for use in the business activity may be grouped with the business.
For example, Dr. Jones owns a building that houses his dental practice and a travel agency. Because he owns 100% of the building and practice, the tax loss on the practice portion of the building may be grouped with the taxable income of the practice. Because Dr. Jones' income is in excess of $150,000, he gets a deduction that would not be allowed otherwise.
If Dr. Jones has not taken advantage of a cost segregation study, additional tax benefits are available to him at this late date. A cost segregation study breaks out the components of buildings with useful lives less than 39 years, the tax life of the building shell. This allows for a much larger depreciation expense in the first five to seven years of a building's usage. Even if Dr. Jones has owned his building for many years, a study may be beneficial.
Now, on to your personal return. Have you overlooked any available tax credits? Did you, your spouse, or another family member incur educational expenses in 2009? Have you made energy saving improvements to your home in 2009? These include doors, windows, water heaters, furnaces, etc. Check with your vendor to determine eligibility. Many other state/federal credits are available; consult your tax professional.
If you are a high–income doctor with college–age children, consider their dependency status. If it is possible to demonstrate that the student is financially independent, then the child can take advantage of the HOPE Educational Credit and the Lifetime Learning Credit. To be independent, the child must have covered more than 50% of his/her annual support from his/her own funds, including wages, investments, and/or savings.
Finally, compare your 2009 and 2008 returns. Investigate differences in amounts and categories. Perhaps you just forgot something. Happy tax filing!
John McGill provides tax and business planning exclusively for the dental profession and publishes “The McGill Advisory” newsletter through John K. McGill & Company, a member of the McGill & Hill Group, LLC. Bo Elliot, CPA, provides accounting and CPA services through Elliott Davis, affiliate of the McGill & Hill Group, a one–stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com for more information.