Charles Blair, DDS
John McGill, MBA, CPA, JD
I incorporated my practice last year and am having trouble deciding whether to claim certain expenses, such as travel, continuing education, business cars, dues and subscriptions, etc., on my personal income-tax return or my corporate return. My accountant recommends that I claim these expenses on my corporate tax return. I think that I would get a bigger benefit by deducting these expenses personally. What do you think?
We recommend that all business-related expenses be paid by the corporation and deducted on its return to assure full deductibility. While you may be in a higher income-tax bracket personally, these expenses will not be fully deductible if you pay them personally and attempt to deduct them on Schedule A of your federal income-tax return.
Under the current tax law, these items are deductible as miscellaneous itemized deduction only to the extent that, in the aggregate, they exceed 2 percent of your adjusted gross income. Furthermore, even after meeting this threshold, the deductible expense may be further limited. Under current tax law, all itemized deductions are phased out by 3 percent of the amount by which your adjusted gross income exceeds the threshold amount, which is $126,600 for 1999.
I purchased a practice from a retiring dentist. In order to get a practice-purchase loan, the bank required me to carry life, disability, and business-overhead insurance. Can I deduct these premium costs on my federal income-tax return?
Expenses for life insurance premiums are not deductible, regardless of the fact that the bank required you to take out the policy in order to receive the practice-purchase loan. On the other hand, premiums for business-overhead-expense policies are fully deductible for federal income-tax purposes.
Deductibility of disability insurance premium expenses is somewhat more complicated and depends on your form of business. If you operate as an unincorporated sole proprietor, partnership, or in a Subchapter S corporation, premiums will not be deductible. Doctors operating as a "C" corporation can deduct disability insurance premiums if paid by the corporation. However, in the event of disability, the disability proceeds would be fully taxable to the doctor. Alternatively, incorporated doctors may choose to pay the premiums personally, in which case the premium payments are not deductible, but proceeds are received tax-free.
During 1998 I rented out my vacation home for most of the year, but I also let some friends and relatives use it on a part-time basis. If my total deductions exceeded my income, can I fully deduct the loss against my dental-practice income?
Only if your personal-use time did not exceed 10 percent of the days that your vacation home was actually rented. "Personal use" includes the days you or a family member used the property, anyone who paid no rent (or a rent lower than that charged for similar properties), or anyone who allowed you to use another property in exchange for using yours. Fortunately, you do not have to count as personal days any time spent primarily repairing and maintaining your property, even if other family members were there for recreation purposes.
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. 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, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.