by Charles Blair, DDS and John McGill, MBA, CPA, JD
Recently, I was notified that I had been selected for an IRS audit. During the course of the audit, the IRS agent insisted that my corporation must operate on an accrual tax basis because it uses supplies in providing services to my patients. My CPA strenuously objected to this, but the IRS agent does not appear to be willing to give in. Do you have any advice on this?
Yes. In the recent Tax Court case of Osteopathic Medical Oncology and Hematology, P.C. v. Commissioner, 113 T.C. 376 (Nov. 22, 1999), the Tax Court held in a similar situation that chemotherapy drugs used in connection with services provided by a cash-basis professional medical corporation were not merchandise under Section 471 of the tax law. Inventory accounting and accrual tax basis were not required.
In an earlier case, the Tax Court had reached the same result in Hospital Corporation of America v. Commissioner, 107 T.C. 116 (1996) with regard to medical supplies dispensed to patients during a hospital stay.
More importantly, in a recent Action On Decision (200-05 issued April 27, 2000), the IRS announced that it agreed with the result reached in the above-referenced cases. Accordingly, once the IRS agent becomes aware of this information, he should "call off the dogs." If he does not, your CPA or other legal representative should advise him that his action is in contradiction to a published IRS ruling, and, consequently, you will be seeking attorney's fees and other damages should he continue to press his case and should litigation be required.
I have read that a recent change in the law allows doctors to work after age 65, without reducing their Social Security benefits for the amount of income earned. While I will be 65 next year, I would prefer to delay receiving Social Security benefits until I quit practicing at age 70, since I will be in a lower tax bracket. Will I be compensated for this delay in drawing my benefits?
Yes. The recent tax law change to which you referred now allows doctors age 65 or older to receive full Social Security benefits, regardless of their income. Doctors age 62 through 64 who elect to begin receiving Social Security benefits early are still subject to a reduction in their benefits for the amount of their annual earnings.
In your situation, you would be entitled to a retirement credit (increased benefits) if you elect to delay receiving Social Security benefits until age 70. Under current law, the credit increases your Social Security benefits by a percentage that ranges from 3 percent to 8 percent a year, depending upon your year of birth. No additional credit would be given for receiving Social Security benefits after age 69.
I am planning to sell my practice and retire in the next few months. In connection with my planned retirement, I will need to purchase a 'tail" malpractice policy to cover any claims that may arise following the sale, but which relate to the time period in which I was in practice. Is this expense immediately deductible in the year that I pay it?
Yes. In the recent Tax Court case of Steger v. Commissioner, 113 T.C. No. 18 (Oct. 1, 1999), the court held that a payment made for a malpractice insurance policy providing coverage for an indefinite period of time for professional services rendered before the taxpayer's retirement was immediately deductible, since it was an ordinary and necessary expense incurred in connection with the closing of the taxpayer's business. Accordingly, this expense should be immediately deductible in your practice.
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 is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. 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 ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.
