Charles Blair, DDS
John McGill, MBA, CPA, JD
I have practiced as a sole proprietor for 20 years and have had the same accountant. At the end of each year, the accountant computes the profit and loss of my practice and then prepares my federal and state income tax returns. He charges me $2,500 annually to prepare the profit and loss statement for my practice and to file my tax returns. He told me that this was a tax return preparation expense and thus could be deducted only as a miscellaneous itemized deduction.
However, due to my income level, I have not been getting any tax benefit from this. Is there any other way that I can handle this to get a decent tax break?
There is. The cost of computing the profit and loss of your practice is an ordinary and necessary business expense deductible on Schedule C of your tax return. The remaining portion of the fee, equal to the cost of preparing the remainder of your tax return, will be properly classified as a miscellaneous itemized deduction.
To document this properly for the federal and state tax authorities, your accountant should give you an itemized billing. It should show what portion of the fee is allocable to the preparation of the practice profit and loss statement (fully deductible on Schedule C) and what portion relates to the preparation of the remaining tax return items (deductible on Schedule A as a miscellaneous itemized deduction). Since the vast majority of the fee is related to the preparation of the profit and loss statement, you may be able to deduct as much as $2,000 or more of the annual fee that you are pay. This will not only reduce your federal and state income taxes, but your self-employment tax as well.
I have been in practice for approximately six years and have begun saving for retirement. My wife is working full-time with a large company that has a 401(k) plan. Under the plan, the company matches employee contributions to the plan, but otherwise contributes nothing to the plan on behalf of the employee. Although my wife is eligible to participate in the plan, she did not defer any of her salary last year, nor did she receive any company match.
Before the April 15th deadline, I contributed $2,000 to IRAs for me and my wife, a total of $4,000. Our accountant refused to deduct our contributions since he said that my wife was covered under her company`s 401(k) and thus the income-eligibility levels eliminated deductibility. Is this correct?
No. Under current tax law, the $2,000 IRA deduction is allowed for each of you, regardless of your income level, unless either of you are an "active participant" in a qualified retirement plan. To be considered an "active participant" in a 401(k) plan, an individual must not only be eligible to participate in the plan, but must actually participate and receive a contribution allocation under the plan.
In your case, while your wife was eligible to participate, she never began participating in her company`s 401(k), and thus is not considered to be an active participant. Accordingly, you should claim a full $4,000 IRA deduction on your federal and state income tax returns. In the event that you previously have filed these returns, you should file an amended return to claim these deductions and obtain the refunds that rightfully are due you.
It is recommended that you contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.