Charles Blair, DDS and
John McGill, MBA, CPA, JD
I have employed my wife for several years in my unincorporated, general dental practice, doing laundry and cleaning. I have paid her an annual salary of $2,000 for these services in order to maintain eligibility for an annual IRA contribution.
After years of trying, I finally convinced my wife to enter dental-hygiene school so she can work in the office as a hygienist. I had planned on increasing her salary by the cost of her education, and having her take the deduction for her educational costs, since this education will be furthering her skills in the same line of work for her employer.
However, my accountant tells me that I cannot do this, on the basis that the only reason my wife was employed in the first place was because she was my wife. I say that this should not matter since she performed work for me and was compensated commensurate with her skills and the work provided over the years. Isn`t the cost of her education a legitimate deduction?
As a general rule, Section 162 of the Internal Revenue Code allows a deduction for educational expenses as an ordinary and necessary business expense, provided that certain tests are met. First, the education must maintain or improve job skills, or the education must meet the requirements of the employer or applicable laws or regulations in order to retain a job, job status or rate of compensation.
Even if either of these tests are met, expenses are not deductible if the education is required in order to meet the minimum educational requirements for qualification in the employment, or if the education will qualify your wife for a new trade or business. The biggest hurdle in deducting these expenses will be determined by whether this education qualifies your wife for a new trade or profession. In most states, an employee cannot perform dental-hygienist functions without receiving the education that your wife is pursuing. As a result, this represents the minimal educational qualifications for this job in most states. If your state requires this education to be licensed as a hygienist, this expenditure would not qualify as a deductible educational ex- pense.
I plan to start a family limited partnership and, thereafter, transfer the ownership of my dental equipment into it, and then lease the equipment back to my professional corporation.
Although my equipment is fully depreciated, I understand from a loan company that I can claim full-replacement value, rather than the market value, for the equipment for purposes of this transaction. Is this correct?
It is not. The equipment`s fair-market value is the determinative value for purposes of this transaction. This is defined as the amount of money that a willing buyer would pay for this equipment at its current age, state and condition. While this would be something more than its depreciated book value, it would be significantly less than replacement cost.
To arrive at this value, we would recommend that you have a dental-supply company appraise the equipment and provide this value to you. This appraisal will determine the value of the transfer made into the partnership for federal and state gift-tax purposes, as well as in determining the fair-market lease rate charged by the partnership to your corporation for its use.
Recently I received a statement from my mutual-fund company showing dividends and a large, long-term capital gain. However, I did not sell any shares and I have only owned the fund for a few months. What`s going on?
Each year, mutual funds must pass along to their shareholders gains on the stock managed or sold from the fund`s portfolio during the course of the year. No matter how long you have owned the mutual fund, you will receive long-term capital gains from the shares of stock held by the fund for more than one year, and will also be taxed on your share of the fund`s short-term gain, which are reported as ordinary dividends on the 1099-DIV that you receive.
Unless your mutual fund is being held in your retirement plan or IRA account, you will have to pay tax on the dividends and long-term capital gain as shown, even if you had these amounts automatically reinvested. As far as the IRS is concerned, it is the same situation as if the mutual fund had sent you a check for your share of the dividends and gains, and then you used these proceeds to buy additional shares. That is why you must be careful in purchasing mutual funds near year-end, since you will have to pay taxes on your prorata share of the fund`s gains, for the entire year, even if you owns the mutual fund for a short period of time.
I have a defined-benefit pension plan and may have to terminate it due to heavy funding costs. What are the consequences of this as far as the IRS is concerned?
The IRS permits doctors to terminate a qualified retirement plan, as long as there are reasonable business grounds to do so. If the plan requires funding in excess of your financial ability, or if legal, accounting and administrative costs are excessive, are reasonable business reasons to terminate a plan.
While the plan can be terminated and the assets distributed without IRS approval, we would not recommend this approach. We would recommend requesting a favorable determination letter on the plan termination from the IRS, since the IRS is suspicious of plans that are terminated without a letter request. This reduces the risk of an IRS plan audit. Also, receipt of a favorable determination letter assumes the tax-free rollover of funds to an IRA account.
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 ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.