Charles Blair, DDS
John McGill, MBA, CPA, JD
I`ve incurred several thousands of dollars in expenses for continuing education, travel, business car, and dues, which I paid personally, rather than through my professional corporation. I planned to deduct these on my individual income-tax return, but my accountant says I can`t. What`s the problem?
Several problems face doctors who attempt to deduct personally paid employee business on their individual income-tax returns. First, employee business expenses, such as those that you paid, are deductible only to the extent that the total exceeds 2 percent of your adjusted gross income (AGI) during any year. Even this amount can be further reduced for high-income doctors. The total of all itemized deductions (home mortgage interest, charitable contributions, state and local income and property taxes, and miscellaneous itemized deductions) is reduced by 3 percent of the amount by which the doctor`s AGI exceeds the threshold amount ($121,200 in 1997).
Even if any of the expenses paid still remain deductible after jumping through these two hoops, a third test remains. If your professional corporation had a policy of allowing you to be reimbursed for these expenses during past tax years, the government will not allow any deduction on your individual return (see Putnam v. Commissioner, T.C. Memo 1998-285).
As a result of these rigorous rules, we recommend that all business expenses related to your practice be paid by your corporation and deducted on its return to assure full deductibility.
Recently, I read that a tax-law change has reduced capital gains rates. Since I have several stocks that I`m ready to sell, what`s the good news here?
The IRS Restructuring and Reform Act of 1998 included a provision favorable to doctors holding stocks, bonds, real estate, or other appreciated assets that they are looking to sell. While the maximum tax rate on long-term capital gains did not change (20 percent for most assets), the holding period required to qualify for this favorable, maximum long-term capital-gains rate was reduced from 18 months to 12 months.
This change has been made retroactive to January 1, 1998. Thus, while the rate itself has not changed, the shorter holding period required to qualify should allow doctors to convert some gain to the lower maximum capital gains rate, while significantly simplifying their accounting and recordkeeping.
I lease my personally owned office building to my professional corporation at a rent that`s just high enough to cover my mortgage payment. Now, I hear that this is the wrong strategy, and that I should be paying the highest reasonable rent possible. Is this correct?
It is. We recommend paying the highest reasonable rent to remove funds from the corporation without being subject to the Medicare payroll tax (2.9 percent), which applies to funds otherwise withdrawn in the form of salary.
In addition, paying the highest reasonable rent can help maximize family tax savings, if ownership of the building is transferred to lower-tax-bracket children (over age 14) or to a partnership or limited-liability company set up on their behalf.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair (left) 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.