Charles Blair, DDS
John McGill, MBA, CPA, JD
I have been in practice for about six years now and have not set up any type of retirement program for my unincorporated practice. Last year, I contributed $2,000 to an IRA for myself and would like to make another contribution this year. My wife does not work outside the home and, therefore, I understand that no contribution can be made on her behalf.
My practice has been growing rather rapidly recently and I would like to contribute more than $2,000, if possible. I had considered a
401(k) profit-sharing plan, but the rules seem complex and the setup and administrative costs are fairly high. I talked with my broker about this and he suggested setting up a salary reduction SEP. Will this work?
No. We applaud your desire to begin funding your retirement with something more than the paltry $2,000 IRA contribution. You should note that the 1996 tax law now allows a fully $2,000 contribution to be made on behalf of your spouse as well, even though she has no earned income. Accordingly, your family can contribute and deduct $4,000 to IRAs for 1997.
If you are able to contribute more than this amount, you will need to look at other retirement-plan alternatives. Unfortunately, the 1996 tax act eliminated salary reduction SEPs as an option. In fact, the new tax law replaced the salary reduction SEP with the SIMPLE retirement plan that we have discussed in previous columns. If your spouse was gainfully employed through the practice at a salary of $6,000, the two of you could contribute and deduct as much as $15,000 or more into a SIMPLE plan on your behalf, with staff contributions limited to approximately 3 percent of pay. We believe the SIMPLE retirement plan will be the plan of choice for doctors who have been funding IRAs and who wish to increase retirement funding.
I am contemplating purchasing some new dental and office equipment. I talked with my CPA regarding the ability to immediately write-off the cost. He told me that the rules regarding tax write-offs had been changed. What does the new law allow?
The 1996 Small Business Tax Act increased the amount of equipment purchases that doctors can immediately expense on their federal income tax returns. While the annual expensing limit was $17,500 in 1996, it has been increased for later years. The annual expensing limit is $18,000 for 1997, $18,500 in 1998, $19,000 in 1999, $20,000 in 2000, $24,000 in 2001 and 2002 and $25,000 beginning in 2003.
My front-office staff members are overworked. I want to bring in some part-time help. I have a daughter, 13, who I want to employ this summer and pay her for her efforts. My accountant tells me that this is illegal. Is it?
Numerous court cases have allowed deductions for wages paid by a parent to a minor child for bona fide services rendered in a business. In one such case, Eller v. Commissioner, Tax Court Memo 77 T6 934 (1981), the court upheld deductions for wages paid to children as young as seven years old in exchange for services rendered. Provided that your child actually works in your practice, a deduction for reasonable wages paid to her will be upheld. You should note that each child can earn up to $4,150 annually, free of federal and, in most cases, state income taxes.
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, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.