Charles Blair, DDS and John McGill, MBA, CPA
Over the past three years, I have suffered over $200,000 in investment losses in my personal stock portfolio. Since I knew I could only deduct $3,000 a year, this is the only amount that I turned in to my CPA for preparation of my tax returns.
I have just located an associate to join me and plan to sell my practice to him in two years for $300,000. I would like to offset the losses that I previously suffered against any gain from the sale, but I am afraid that I will be unable to do this, since I did not claim these losses on my prior year's tax returns. What should I do?
You should file an amended tax return (Form 1040X) for each year in which you had additional losses that were not claimed. While these amended tax returns will not give rise to any tax refunds for those years, you will be able to carry forward the excess, unused losses to future years, where they then can be used to offset gains from your future practice sale. In this way, you will receive at least a portion of the practice-sale proceeds equal to the capital losses carried forward, on a tax-free basis.
I recently read about the reduction in tax rates under the new 2003 tax law. I have always made sure that my federal- and state-income-tax withholdings exceeded the amount I will actually owe, so that I would get a refund after filing my return. Should I use my larger refund next year to pay off credit card debt or should I invest it?
First things first! We recommend that you reduce your federal-tax withholding and/or estimated payments to reap the benefit of the lower taxes you will owe now, rather than waiting for a refund after you file your return next year. IRS statistics show that nearly 70 percent of all individual returns filed result in a refund. While receiving that refund check may seem great, it's actually an interest-free loan to the IRS. Accordingly, we recommend that you contact your CPA now to determine your projected 2003 federal income tax liability and reduce your income tax withholding and/or estimated tax payments accordingly.
As a general rule, doctors are best served by using available cash to pay off high interest-rate, credit-card debt first. Doing this represents a guaranteed double-digit investment return that is extremely difficult to duplicate in today's volatile investment climate.
My practice operates as a professional association and sponsors a qualified retirement plan. Is it possible to invest the funds in real estate (for purposes of accumulating money for retirement), rather than investing all funds in stocks, bonds, and mutual funds?
As a general rule, most doctors are best served by maximizing contributions to qualified retirement plans as their first priority. These contributions are not only tax-deductible for federal and state income-tax purposes, but the earnings grow on a tax-deferred basis, the funds within the plan are protected from the claims of creditors, and they are generally taxed at lower rates upon withdrawals. Once the doctor has fully-funded his retirement-plan contributions, investing additional funds in real estate makes sense, particularly for the purchase or construction of a new office building.
Funds that are contributed to a qualified retirement plan may not only be invested in cash, stocks, bonds, and related mutual funds, but also in real estate. While the most common form of retirement plan real estate investment is through real estate investment trusts (REITS), funds also can be invested in raw land and/or commercial/residential real estate. However, doctors should be aware of the fact that investing retirement plan funds in real estate used for the operation of the practice is subject to special restrictions.
I am planning to purchase a used business vehicle through my professional corporation. If the car costs $30,000, how much bonus depreciation will I be entitled to?
None. While the new tax law increases the first year "bonus" depreciation write-off from 30 percent to 50 percent, it applies only to purchases of new business assets. Since the business vehicle that you are acquiring is used, it is not eligible for any "bonus" depreciation. However, it may be eligible for the Section 179 expensing election of up to $100,000.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. Mr. 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.
