Amending Mistakes on Tax Returns

I own a solo unincorporated dental practice, filing on a cash basis. In May of 1994, I began leasing an intraoral camera and, later that year, I bought out the balance of the lease agreement and received full ownership.

Charles Blair, DDS and

John McGill, MBA, CPA, JD

Question:

I own a solo unincorporated dental practice, filing on a cash basis. In May of 1994, I began leasing an intraoral camera and, later that year, I bought out the balance of the lease agreement and received full ownership.

For some reason, this cost was expensed on my 1994 tax return under dental supplies, not equipment. If this equipment otherwise qualifies, is it to my advantage to amend my tax return in order to receive the substantial tax credit available under the Americans With Disabilities Act?

Answer:

We would recommend that you file an amended 1994 federal income-tax return for two reasons. First, it was improper for your accountant to expense the entire cost of the intraoral camera as "dental supplies."

While the same result could have been achieved through utilizing the Section 179 expensing election of up to $17,500 in 1994, this would have required that the expensing election be made on Form 4562 of your federal income-tax return. Accordingly, your tax return needs to be amended to make this correction.

Taking advantage of the ADA credit will provide the greatest tax benefit for you. As you may know, qualifying equipment is eligible for a tax credit of 50 percent of the total cost, up to a maximum qualifying cost of $10,000 annually. Accordingly, you could qualify for a maximum tax credit of $5,000 during any one year.

A tax credit is superior to a deduction, since the tax credit is a dollar-for-dollar reduction in the total liability owed to the IRS. Since the maximum federal tax rate is 42-45 percent, the $5,000 tax credit will be worth more to you than a $10,000 deduction. The fact that you leased the system for a few months should not represent a barrier to taking the tax credit since you obtained full ownership of the property during the tax year.

Question:

I am a sole proprietor general dentist with a profit-sharing plan. My wife is a physician with a totally separate practice, and she has a combination pension and profit-sharing plan. Even though we have separate businesses, my retirement plan administrator recently notified me that, since we are a married couple with children under age 21, our businesses would be deemed to be under common control. Thus we would be limited to a maximum annual funding of $30,000 together, rather than separately.

His logic was that under the stock aggregation rules, minor children are considered as owning stock of the parents, and thus both businesses would operate under common control and be restricted by this limitation. I have checked with two stockbrokers and they felt that this interpretation was false. Please let me know your opinion as soon as possible.

Answer:

This is your lucky day! Assuming that you and your wife maintain totally separate practices, and that neither of you are an owner, director, officer, or employee of the other`s practice, your separate practices will not be considered as under common control for purposes of the retirement- plan rules. In addition, even if your retirement plan administrator`s reasoning were otherwise correct, your children could not be deemed to own the shares of stock in your dental practice and your wife`s medical practice since, under state law, only licensed professionals may own these shares.

As a result, each practice is free to maintain completely separate retirement plans for the benefit of their employees. We would certainly recommend that you maximize the funding in both practice`s plans in order to minimize the amount of your combined income subject to federal and state income taxes.

Even if you and your wife were together in the same practice, the retirement-plan limitation (family member aggregation rules) which would otherwise apply to your practice has been repealed, effective this year.

Question:

Four months ago, I bought 4,000 shares of a software company stock at just over $15 a share. Recently, the company has received a cash buyout offer of over $30 from a competitor. The transaction should probably be completed within approximately two months, if it is approved by shareholders.

If the transaction goes through, I will have over $60,000 in short-term capital gains that will be taxed as ordinary income over and above my other anticipated income. While I would wish to delay the cash payout received until the next calendar year, I do not feel that this is possible given the terms of the proposed transaction.

I would consider making a gift of some of the stock to my children who are 21 and 23; unfortunately, they are too young and lack the financial maturity to handle an outright gift at this time, and I am afraid that this my do more harm than good. Do you have any suggestions?

Answer:

We would recommend that you establish a family limited partnership. Under this arrangement, all of the partners in the partnership would be family members, with you and your spouse acting as general partners, while your children would own the limited partnership interest. Once the limited partnership was set up in accordance with state law requirements, you would thereafter transfer your shares of stock in this company into the partnership, in exchange for general and limited partnership interests of equal value. Thereafter, you would gift the limited partnership interests out to your children.

You must act quickly, if you wish to take advantage of this sophisticated tax-planning technique, however. This establishment of the family limited partnership and the gifting must take place prior to the approval of the transaction, or otherwise the IRS may find that you effectively gifted the sales proceeds themselves, rather than the shares of stock, and would deny the substantial tax benefits otherwise afforded to you.

If the transaction if properly handled, the tax benefits can be extremely favorable for you. For example, at least half of the $60,000 gain can be shifted from being taxed as ordinary income in your high tax bracket to your children`s tax ;bracket of 15 percent. Shifting this portion of the income to a lower tax bracket could save you $12,000 or more during this tax year. More importantly, through utilizing the family limited partnership, you will be able to retain control over the sales proceeds within the partnership as well.

For additional free information on this subject, send a self-addressed, stamped ($.52) envelope to Blair/McGill & Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217 and request "Family Limited Partnership" articles.

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.

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