by John McGill, MBA, CPA, JD
As the end of the year approaches, now's the time for doctors to implement changes that can cut taxes in 2003 and 2004. This listing of top 50 year-end, tax-planning strategies under the new law is presented as an added "bonus" to this month's issue.
1 Make maximum use of the annual Section 179 expensing election to immediately write off new or used equipment purchases made during the current year. This expensing election amount has been quadrupled to $100,000, beginning this year.
2 Increase practice efficiency and slash your taxes by replacing labor with technology, and take advantage of the newly increased 50 percent bonus depreciation available for all purchases of new dental, office and/or computer equipment, office furniture and leasehold improvements.
3 Contact your CPA to determine the tax savings available from electing Subchapter S corporation status for your practice, effective January 1, 2004. In most states, doctors will be able to significantly reduce payroll taxes by taking a lower salary (with the remaining profit distributed as a dividend not subject to payroll taxes), reduce income and payroll taxes on their practice sale, and lower their IRS audit risk and exposure.
4 Defer practice income into 2004 by slowing billing and collection activities in December. Incorporated doctors also can convert shareholder loans to salary during 2004, rather than 2003, in order to shift income into next year. Also, incorporated doctors should fully utilize any existing corporate net operating losses to defer income into 2004, by using available cash to pay down corporate debt, rather than taking these funds as additional salary in 2003.
5 Accelerate deductions by paying all supply, lab, and other practice expenses on or before December 31. Remember: amounts charged on credit cards on or before December 31 count as a 2003 deduction, even if the bill is paid next year.
6 Increase tax-free income by renting your personal residence or vacation home for up to 14 days each year. If not otherwise used, rent your personal residence or vacation home to your practice for board of director, shareholder, staff retreats, staff training or other business meetings. The rental paid by the practice will be tax deductible, while up to 14 days of rental income can be received tax-free pursuant to Section 280A(g).
7 Increase tax-free income by making sure that the practice reimburses you for all business expenses paid personally during 2003, such as travel and entertainment, business car expenses, dues and subscriptions, advertising and promotion, continuing education, safe deposit fees, and tax return and planning fees.
8 Increase tax-free income by making sure that the practice is paying all medical insurance premiums for the doctor and his or her family. Medical insurance premiums are now 100 percent deductible for all doctors (C corporation, S corporation, unincorporated, etc.).
9 Increase tax-free income (regular C corporations only) by having the corporation pay all physical- and diagnostic-procedure expenses incurred by either spouse as corporate officers.
10 Increase tax-free income (regular C corporations only) by paying disability insurance premiums on a personal basis and have your corporation reimburse the doctor following the close of the policy year, provided that you are not disabled. If the doctor does become disabled, no reimbursement should be made, and he or she can take the position that the disability proceeds received should be tax-free, since in the year of disability, the premiums were paid personally.
11 Increase tax-free income (regular C corporations only) by making sure that the doctor is properly reimbursed before December 31 for all unreimbursed medical expenses (deductibles, co-payments, items not covered, etc.) under the practice's medical-expense reimbursement plan, and for child-care expenses under the practice's dependent-care assistance plan. Unincorporated and S corporation doctors should utilize an insured medical-expense reimbursement plan. This is available in most states through Exec-U-Care at (800) 552-1213. Deduct 100 percent of the premium costs related to medical expenses not covered by the primary insurance plan.
12 Make sure that the practice takes advantage of the Disabled Access Tax credit of up to $5,000 annually for the cost of building improvements, such as expansion of hallways, repaving parking area, installing wheelchair accessible ramps or new handicapped bathrooms, adding new carpet or floor coverings to make your practice facility more accessible to the handicapped, or for equipment purchased to provide services to the handicapped.
13 Make sure that the corporation fully utilizes the $15,000 expensing election under Section 190 of the tax law for expenditures made to remove architectural and transportation barriers to provide services to the handicapped and elderly.
14 Separate fully-deductible travel, lodging and continuing-education expenses from meal and entertainment expenses for tax-reporting purposes. In addition, make sure that all meal expenses for staff meetings, functions, and outings are classified as "office expenses," since they remain fully deductible under Section 274(n) of the Internal Revenue Code.
15 Increase business deductions through purchasing artwork and business luggage through the practice with tax-deductible dollars.
16 Make sure that all travel is business-related (continuing-education meetings, consults with colleagues, board of directors meetings, etc.) to eliminate non-deductible personal travel costs. To document consults with colleagues, plan to send a letter to the doctor confirming your visit, as well as a follow-up letter thanking him for the opportunity, outlining what you learned from the four-hour, in-office visit, and inviting him to visit your office.
17 Maximize business-related dues and subscriptions to magazines, newspapers, and other periodicals paid through the practice. Purchase a business computer and other office furniture and equipment through the practice, and use it at home for confidential duties such as practice accounting, payroll and personnel matters.
18 Pay all miscellaneous expenses such as tax-return fees, safety-deposit box rentals, dues and subscriptions, etc., through your practice and deduct them on your corporate or practice tax return to assure full deductibility.
19 Reduce your regular C corporation's taxable income to zero at year-end by paying a bonus to the doctor and making retirement plan contributions, if appropriate. Retaining earnings in your C corporation makes sense only to the extent necessary to fully utilize existing net operating losses and the $5,000 ADA tax credit.
20 Claim additional first year "bonus" depreciation for purchases of new business automobiles or home computers used more than 50 percent of the time for business purposes. Under the new tax law, combined first-year depreciation write-offs for such automobiles is increased to $10,710.
21 Consider purchasing a sport-utility vehicle rated at 6,000 pounds or more fully loaded in order to obtain a six-year write-off, to achieve eligibility for the $100,000 expensing election (if business use is at least 50 percent), and to avoid the luxury automobile tax. Qualifying sport utility vehicles include the BMW X5, Cadillac Escalade, Lincoln Navigator, Chevrolet Suburban and Tahoe, Ford Expedition and Excursion, GMC Yukon and Sierra Denali, Hummer H1 and H2, Mercedes M-Class SUV, Range Rover, Toyota Land Cruiser and Sequoia, Land Rover, Porsche Cayenne, Volkswagen Touaraeg, and the Lexus LX 470.
22 Pay all operating expenses for your business automobile through your practice and deduct the actual cost of operation, rather than the 36 cent per mile rate. The auto expenses that should be paid through the practice include gas, oil, maintenance, repairs, taxes, tags, licenses, and insurance. Keep a log on a three-month basis, and show any personal usage as income on your W-2.
23 If you are a male dentist and your spouse does not work outside the home, employ her through the practice and pay her an annual salary of $3,000 (generally) to qualify her for minimum Social Security benefits, the child-care credit, as well as fully-deductible practice travel and fringe benefits, while minimizing payroll taxes. If your family has two or more children under the age of 13, and child care expenses exceed $3,000 annually, increase the annual salary to equal the annual child care expenses, up to a maximum of $6,000 annually.
Moreover, if your practice operates a SIMPLE-IRA retirement plan, increase the spouse's salary to $9,000, in order to qualify her for the maximum SIMPLE-IRA deferral ($8,000 in 2003). If your practice plans to sponsor a 401(k) profit-sharing plan in 2004, increase your spouse's salary to $15,000 to qualify for the maximum deferral of $13,000 in 2004, $14,000 in 2005, and $15,000 a year thereafter. Finally, if the doctor and spouse are both over age 40 — and the practice operates an age-based retirement plan (target benefit-pension plan, cross-tested or age-weighted profit-sharing plan, or defined-benefit pension plan) — consider paying the spouse the highest reasonable salary in exchange for her services to generate a larger tax-deductible, retirement-plan contribution.
24 If you do not have a practice retirement plan, set one up on or before December 31 to qualify for a 2003 tax deduction. Procrastinators have until April 15, 2004, to establish a SEP and still deduct contributions on your 2003 return.
25 Contribute the maximum amount possible to your practice retirement plan, as long as at least 60 percent of the amounts are allocated to the doctor and spouse's account. If the doctor and spouse are receiving less than 70 percent of the total amounts allocated, contact Jason Arnold, East Coast district manager of PenSys, Inc., at (888) 440-6401 to discuss having a plan-design analysis performed to determine what retirement plan will prove most cost effective for your practice.
26 Consider utilizing a cost-segregation study if you purchased or constructed your office building after 1986, in order to reclassify some costs as nonstructural for faster depreciation write-offs.
27 Contribute the maximum "catch up" contribution to your 401(k) profit-sharing plan ($2,000 in 2003, $3,000 in 2004) for each spouse age 50 or older.
28 If age 45 or older, consider establishing a defined-benefit pension plan to substantially increase your tax-deductible, retirement-plan contributions beyond the maximum $40,000 annual allocation otherwise allowable to a doctor. As a result of the repeal of Section 415(e), your practice can make substantial defined-benefit plan contributions, without regard to amounts contributed or accumulated under prior retirement plans.
29 If you or your spouse operates a separate full- or part-time sideline business, consider establishing a separate retirement plan for that business and maximize tax-deductible contributions to it.
30 Fund nondeductible IRA contributions for the doctor and spouse in the amount of $3,000 per spouse, or $6,000 total for 2003, and on January 1 of each year thereafter, from amounts otherwise available for personal savings. Establish these as tax-free Roth IRA accounts for qualifying doctors and spouses (less than $150,000 of AGI, if married). If you exceed this income level, establish these as regular nondeductible IRA accounts.
31 Contribute the maximum "catch-up" contributions to your IRA in 2003 and on January 1 of each year thereafter, in the amount of $500 for each spouse age 50 or older.
32 Consider converting your regular IRAs into Roth IRAs if eligible (less than $100,000 of AGI). While you will owe current federal and state income taxes on the amount converted, the amounts transferred into the Roth IRA will grow tax-free in the future.
33 Employ children age six or older through your practice where feasible, in order to fund college savings, private school costs, etc., on a tax-deductible basis. Each child can earn $4,750 in 2003 and $4,850 in 2004 tax-free, in exchange for services actually rendered.
34 Establish a Roth IRA for each employed child and contribute $3,000 in 2003, and on January 1 of each year thereafter. While these contributions are non-deductible, all future earnings will be tax-free when withdrawn after age 59 1/2.
35 Do not claim any college-age children as dependents on your federal or state income tax returns. Rather, have them pay for their college education and living expenses from their own funds, custodial accounts, or by taking distributions from a family limited partnership. By using this strategy, your children will be eligible for the HOPE educational tax credit ($1,500 a year during the initial two years), and Lifetime Learning Credit ($2,000 educational tax credit during the remaining years).
36 Reduce income taxes further by shifting income-producing property (dental and office equipment, office building, etc.) to a family-limited partnership (FLP), Subchapter S corporation, or limited liability company (LLC), set up on behalf of your children age 14 or older.
37 Increase the income shifted to lower tax-bracket children through having the family Subchapter S corporation, FLP, or LLC begin operating an in-house lab and/or records business.
38 Transfer appreciated property (e.g. stocks, bonds or real estate) that you plan to sell to your children age 14 or older, or to an FLP or LLC set up for their benefit. Thereafter, they can sell this appreciated property and have the capital gain taxed at rates as low as 5 percent, and use the proceeds to fund educational and other costs.
39 Increase the rent charged to your practice for use of the professional office building and/or equipment to the highest reasonable rate in order to withdraw funds from the practice payroll tax-free, and to increase the income shifted to lower tax-bracket children where this property is owned by a FLP, LLC, or Subchapter S corporation on behalf of the children.
40 Have the family FLP or LLC purchase all new equipment needed for the practice with its existing funds and lease this equipment back to the corporation at an annual rental rate equal to 25 to 33 percent of its fair-market value purchase price.
41 Have the family limited-partnership loan funds necessary to the corporation for working capital or for capital improvements, at a high interest rate (15 percent), in order to shift additional funds from the corporation to your children on a tax-favored basis.
42 Establish and fund the maximum annual contribution of $2,000 per year to a Coverdell Savings Account (formerly known as Education IRAs) for each child to shelter investment earnings for future tax-free payouts to cover college and/or private school costs.
43 Consider funding a Section 529 college-savings plan to shelter additional investment earnings for tax-free payouts to cover future college and/or private school costs.
44 Modify your investment allocations so that one-third of your total assets are in real estate (personal residence, lake home, and office building), one-third are in stocks, with the remaining one-third in bonds. Under the new tax law, it is recommended that the entire bond allocation be held inside the retirement plan or IRAs if possible, with the stock portion held personally and/or in a family limited partnership, to take advantage of the maximum 15 percent tax rate on dividends and capital gains.
45 Increase charitable-contribution deductions by making gifts of property, such as stocks, bonds, artwork, or real estate that have gone up in value, in lieu of cash donations to qualified charitable organizations. The full fair-market value of the property is tax-deductible as a charitable contribution if held for at least 12 months, and the gain is not subject to the regular or alternative minimum tax.
46 Convert nondeductible interest on personal loans into fully deductible status through paying off the debt using a home equity line of credit or consolidating loans as part of a home mortgage refinance to take advantage of lower home mortgage interest rates.
47 Accelerate personal tax deductions by paying any state-estimated income tax payments due in January before the end of the year.
If incorporated, increase your state income-tax withholding on your corporate salary before December 31.
48 Accelerate personal tax deductions by prepaying your home mortgage payment due January 1, and by paying all real estate and personal property taxes due before December 31.
49 Check with your accountant to make sure that your withholding on your corporate salary drawn thus far (or federal estimated income tax payments, if unincorporated) is sufficient to meet your expected federal income tax liability. If not, make an additional withholding on salary taken in order to assure that you will not be liable for any underpayment penalties, or increase your final federal estimated payments, if unincorporated.
50 Consider selling personally owned stock, bonds, or mutual funds that have declined in value before December 31 to realize capital losses that can offset capital gains reportable for the current year. Make sure that you deduct up to the maximum of $3,000 of capital losses in excess of the capital gains realized on your 2003 tax returns.
This article was reprinted from the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. For more information, call (704) 424-9780, or toll free at (888) 249-7537.
