By Susan Finch
As the calendar changes from one year to the next, many New Year’s resolutions center around getting better organized. When it comes to your practice, the end of the year is a great time to start thinking about getting a head start on your business taxes, ahead of the April 15 filing deadline. If you’ve already been keeping tabs on your expenses, receipts and invoices, consider a consultation with your CPA. There’s more to tax time than just rounding up your financial documents. Know how to prepare and ring in the New Year with control over your finances.
During tax time, DCs must first choose whether they are a cash- or accrual-based practice for return purposes. Gail Rosen, a CPA in New Jersey, notes that most chiropractors opt for “cash basis,” meaning they pay taxes on the income when money is received and expenses aren’t recognized until they are paid. However, this doesn’t necessarily mean cash is paid directly from the client. “Cash” could also result in a payment from an insurance company.
The end of the year also provides an opportunity for last-minute deductions in hopes of a more favorable return come April. Chiropractors may opt to pay their bills or purchase new equipment and office inventory before Jan. 1 to receive the proper deductions. And offering year-end bonuses to employees before the New Year results in an additional deduction incentive for the year.
If cash flow is currently an issue at your practice, consider making last-minute charitable donations and paying off expenses all with a company credit card. The IRS looks at the date the expenses are paid by the card itself. That means if you used your credit card in December, but didn’t pay off the card until January, your deduction would still count come tax time. You can also opt to make donations or pay bills by a standard check. Make sure the check is dated before Jan. 1 and the envelope is postmarked accordingly. Keep records of all your transactions and when bills were paid.
Poor tax planning can lead to audits, IRS fees and penalties, low tax returns and an unnecessary amount of added stress to your business. But chiropractors may be unaware of how much they overpay in taxes and how simply changing their business classification could save thousands. According to tax coach and business consultant James Bowen, J.D., partnerships and sole proprietors endure some of the highest IRS audits and taxes. Meanwhile, 90 percent of practices could effectively operate as an S-corporation and decrease their taxes by 30 to 50 percent, as well as protect themselves from the chance of audit.
Bowen believes many chiropractors labor under the assumption that nothing can be done to reduce their taxes. Instead of maneuvering through tax season in the dark, schedule an appointment with a tax or business consultant or a CPA seasoned in dealing with chiropractic practices who is willing to come to your office. Understanding the entire structure of your company, business philosophies, retirement, setup, employee structure and how you operate are all crucial clues to the best possible return and can drastically improve efficient business practices.
Bowen also suggests that it is not just the amount earned that determines what your tax liability will be, but how you account for it. Just like invoicing your patients, bills and expenses must be properly documented for maximum return potential. This oversight is partly due to a lack of tax education, but also from fear of an audit or related penalties. While chiropractors may think they’re in the clear of raising red flags with the IRS by not expensing meals, they may actually be doing the opposite.
Remember that specific expenses, including meals and entertainment, are expected in a business tax return. Without it, the IRS may assume you are burying those deductions elsewhere to maximize your return. Meals and entertainment are generally deductible up to 50 percent, however, the IRS may assume you are being deceptive rather than conservative in your expensing. Further, a lack of expected deductions could signal that you do not understand how to file and raise additional flags.
Save money this tax season by converting personal expenses into deductible business expenses. Some 300 deductions are allowed, though most small business owners pull from a few dozen at best. Bowen suggests DCs get into the year-round mindset of personal to business expense. Ask yourself if your activities benefit your business in any way, shape or form. If the answer is yes, then consider how you will appropriately expense it. Make categorizing your deductions as critical as characterizing your chiropractic services for patients’ health insurance.
Consider some overlooked deductions to include on this year’s return. For example, employing your children could be tax deductible for your business. Direct their earnings into tax deductible Roth or educational IRAs to simultaneously save and protect their assets. Next, ask your CPA about expensing chiropractic equipment and depreciation deductions, as well as renting equipment back to your own business. Other overlooked deductions might include partial care costs for dependents, educational seminars and clothing related to your business.
Overall, a business return should be carefully constructed to reflect appropriate deductions. For example, a chiropractor with tens of thousands of dollars in travel expenses may want to consider how to organize such deductions. Instead of lumping everything into one travel category, the expenses could be broken down across various types of travel, education or seminars to bring greater clarity to the return.
Despite your best intentions to serve your community in need of Chiropractic, there is no write-off for pro bono work. You only pay tax on money earned, and free work means no income. For example, billing someone a discounted service of $50 versus the normal $75 rate means paying tax on the $50 that was actually charged.
However, consider that pro bono work provides a powerful marketing tool and chance for deduction. Community members in need can try your services for a discount or for free in exchange for a testimonial and endorsement. In addition, participating in charity events and raffles advertises your name throughout the community and garners your business a reputation for giving back.
Keep in mind expenses incurred from hosting an event or party is limited by tax law, but there are incentives. For example, if you host a community party, food is only 50 percent deductible, according to the law. Therefore if you spent $100 on food, your tax deduction would be $50. In most cases, a business gift (or, in this case, a raffle prize) is only deductible up to $25 a year for any one individual. Flyers, advertising materials and other marketing expenses related to your event are also fully tax deductible.
Knowing how to organize your business entity can also determine your retirement health. Jason Watson of the Watson CPA Group points out there are numerous retirement account options to which self-employed taxpayers can contribute, and receive deductions for. However, Roth IRAs prove most popular with advantageous tax-free growth.
DCs with an S-corporation are only subject to payroll taxes on salary. Any other profit left in the business for reinvestment or distribution to the shareholder (or in this case, the business owner) is not subject to self-employment tax. This means you can draw a taxable salary, but also enjoy an untaxed profit as well.
For other retirement options, speak to your CPA about tax deferring up to $5,000 in an IRA to quickly and easily reduce personal taxes. If your company employs fewer than 100 workers and has never offered a 401(k) plan, your business could receive $1,500 in tax credits over three years for setting one up. This includes a $500 credit each year to offset the administrative expenses for the plan. Further, matching employer contributions to the plan (a $500 credit each year to offset set-up and administrative expenses of the plan in the form of a match or a profit share) are tax deductible.
Arrange an appointment in December to speak with your accountant or business consultant about new tax measures currently going through Congress. Pre-existing tax cuts may expire and could affect everything from income tax rates, rates for dividends, long-term capital gains rates and which deductions and exemptions are available. Business owners could be drastically affected, or Congress could delay making a decision until next year.
Regardless of what Congress decides, the rule of thumb across the board is to remember tax laws do regularly change and your paperwork, documentation and filing status are all crucial to a legal and profitable return. Always speak to a CPA with experience in Chiropractic and small businesses with tax questions and information about best practices.