Charles Blair, DDS & John McGill, MBA, CPA, JD
To achieve maximum deductibility, we recommend that business expenses be paid through your professional corporation, rather than personally.
Even though I am incorporated, I have paid certain practice business expenses — such as continuing education, travel, meals and entertainment, dues and subscriptions — personally in order to claim them as tax deductions on my individual return since my tax rate is higher. My accountant now tells me that because of my income level, these deductions can no longer be claimed on my personal return. Is this correct? If so, what should I do?
Your accountant is probably correct. Subject to the deduction limitation discussed below, all of the expenses that you pay personally are generally 100 percent deductible, except for meals and entertainment expenses, which are usually 50 percent deductible.
In a situation such as yours, the deductible portion of these expenses is included on Form 2106, Employee Business Ex-penses, then included with any other miscellaneous deductions on Schedule A of your individual income tax return. However, the total of your miscellaneous itemized deductions (including unreimbursed employee business expenses) is deductible only to the extent that they exceed 2 percent of your adjusted gross income (AGI). For example, if your AGI was $250,000, the first $5,000 of these expenses (2% of $250,000) would be nondeductible, and only the expenses in excess of $5,000 would be deductible.
To achieve maximum deductibility, we recommend that these expenses be paid through your professional corporation, rather than personally. Alternatively, if they are paid personally, your corporation should reimburse you for the expenses. In this situation, the corporation can take a deduction for the reimbursement made and you would not have to claim the reimbursement as taxable income.
I am considering establishing a new retirement plan for my practice, since I would like to increase savings for retirement beyond the limits allowed for SIMPLE-IRA contributions. Recently, I attended a seminar that indicated that there was some kind of tax credit for starting up a new retirement plan. Is that correct?
Yes. The 2001 Tax Act added Section 45E to the law, providing substantial tax benefits for doctors who adopt new retirement plans for their practices. Under the law, a doctor is entitled to a tax credit (dollar-for-dollar reduction in his or her tax liability otherwise owed) for 50 percent of the cost of the setup and administration of a new qualified retirement plan. The maximum tax credit allowed is $500 per year and is available for the first three years that the plan is set up and operated.
These tax benefits are limited only to "small" businesses, which are defined as those employing 100 or fewer employees. As a result, most dental practices should easily qualify for this lucrative tax credit, which is provided as an incentive for doctors and staff members to increase funding for retirement.
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, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($195 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.