Charles Blair, DDS, and
John McGill, MBA, CPA, JD
After reviewing hundreds of tax returns this year, we`re seeing more doctors than ever paying record federal and state income taxes. As the end of the year approaches, now`s the time to review all available strategies to minimize your 2000 federal and state income tax liabilities, and to implement strategies that can lower taxes even further. Following you will find our top 49 tax-planning strategies to help you reach these goals.
Tax-planning strategy
1
Contact your CPA to determine the tax savings available from electing Subchapter S corporation status for your practice, effective on Jan. 1, 2001. 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), as well as reduce income and payroll taxes on their practice sale, enjoy the flow-through of the ADA tax credit (discussed below) to reduce the doctor`s personal income-tax liability, and lower his or her IRS audit risk and exposure.
Tax-planning strategy
2
Defer practice income into 2001 by slowing billing and collection activities in December. Incorporated doctors also can convert shareholder loans to salary during 2001, rather than 2000, in order to shift income into next year. Also, incorporated doctors should fully utilize any existing corporate net operating losses to defer income into 2001. Do this by using available cash to pay down corporate debt, rather than taking these funds as additional salary in the current year.
Tax-planning strategy
3
Accelerate deductions by paying all supply, lab, and other practice expenses on or before Dec. 31. Remember that amounts charged on credit cards count as a current-year deduction, even if the bill is paid next year.
Tax-planning strategy
4
Increase tax-free income by making sure that the practice reimburses you for all business expenses paid personally during 2000, such as travel and entertainment, business-car expenses, dues and subscriptions, promotion and advertising, continuing education, safe-deposit fees, tax return and planning fees, etc.
Tax-planning strategy
5
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 100 percent deductible for incorporated (regular "C") corporations, and generally 60 percent deductible for Subchapter S and unincorporated doctors. If unincorporated, consider employing your spouse and having him or her covered as the "named insured" under the medical-insurance policy, so you can convert this into a 100 percent deductible expense.
Tax-planning strategy
6
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.
Tax-planning strategy
7
Increase tax-free income (regular "C" corporations only) by paying disability-insurance premiums on a personal basis and having your corporation reimburse you following the close of the policy year, provided that you are not disabled. If the doctor does become disabled, no reimbursement should be made. He or she can take the position that the disability proceeds received should be tax-free, since, in the year of the disability, the premiums were paid on a personal basis.
Tax-planning strategy
8
Increase tax-free income (regular "C" corporations only) by making sure that the doctor is properly reimbursed before Dec. 31 for all unreimbursed medical expenses (deductibles, co-payments, items not covered, etc.) under the practice`s medical-expense reimbursement plan. Child-care expenses should be reimbursed under the practice`s dependent-care assistance plan. Unincorporated and S-corporation doctors should utilize an insured medical expense reimbursement plan - available in most states through Exec-U-Care, (800) 522-1213 - in order to deduct 60 percent of the premium costs related to medical expenses not covered by the primary insurance plan.
Tax-planning strategy
9
Make maximum use of the annual $20,000 expensing election to immediately write off new or used equipment purchases made during the current year. This increases to $24,000 in 2001 and 2002, and to $25,000 in 2003.
Tax-planning strategy
10
Make sure that the practice takes advantage of the Disabled Access Tax credit of up to $5,000 annually for expenditures made to acquire equipment such as power-lift dental chairs, wheelchair-accessible panorexes, etc., to make your practice more accessible to the handicapped. The cost of building improvements - such as expansion of hallways, repaving parking areas, installing wheelchair-accessible ramps or new handicapped bathrooms, or adding new carpet or floor coverings - also should qualify for the tax credit.
Tax-planning strategy
11
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 the elderly.
Tax-planning strategy
12
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.
Tax-planning strategy
13
Increase business deductions by purchasing artwork for the practice and business luggage through the practice with tax-deductible dollars.
Tax-planning strategy
14
Make sure that all travel is business-related (continuing-education meetings, consultations with colleagues, etc.) to eliminate non-deductible, personal-travel costs. To document consultations with colleagues, send a letter to the doctor confirming your visit, as well as a follow-up letter thanking him or her for the opportunity, outlining what you learned from the four-hour, in-office visit and inviting him or her to visit your office.
Tax-planning strategy
15
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. Use it at home for confidential duties, such as practice accounting, payroll, and personnel matters.
Tax-planning strategy
16
Pay all miscellaneous expenses - such as tax-return fees, safe-deposit box rentals, dues and subscriptions, etc. - through your practice and deduct them on your corporate or practice tax return to assure full deductibility.
Tax-planning strategy
17
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, discussed above.
Tax-planning strategy
18
Consider purchasing a fully loaded sport utility vehicle rated at 6,000 pounds or more to obtain a six-year write-off, to achieve eligibility for the $20,000 expensing election (if business use is at least 50 percent), and to avoid the luxury automobile tax. Qualifying sport utility vehicles include the Lincoln Navigator, Chevrolet Suburban, GMC Yukon, Ford Expedition and Excursion, Range Rover, Land Rover, and the Lexus LX 470.
Tax-planning strategy
19
Pay all operating expenses for your business automobile through your practice and deduct the actual cost of operation, rather than the standard $.325-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. Do this rather than reimbursing the corporation, to the extent your personal-use value exceeds the value of your personally garaging the business car.
Tax-planning strategy
20
Employ your spouse through the practice and pay him or her an annual salary of $3,000 (generally) to qualify him or her for minimum Social Security benefits, the child-care credit, as well as fully deductible practice travel and fringe benefits, while minimizing payroll taxes. However, 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 $4,800 annually. Moreover, if your practice operates a SIMPLE-IRA retirement plan, increase your spouse`s salary to $6,500 to qualify him or her for the maximum SIMPLE-IRA deferral ($6,000). Finally, if 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 his or her services to generate a larger tax-deductible retirement-plan contribution.
Tax-planning strategy
21
If you do not have a practice-retirement plan, set one up on or before Dec. 31, if cost-effective, to qualify for a tax deduction. Procrastinators have until April 15, 2001, to establish an SEP and still deduct contributions on their 2000 returns.
Tax-planning strategy
22
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 receiving less than 70 percent of the total amounts allocated, contact Jason Arnold at (888) 440-6401 to have a plan-design analysis performed to determine what other plan type (cross-tested or safe harbor 401(k) profit-sharing plan, etc.) will prove more cost-effective.
Tax-planning strategy
23
If age 45 or older, consider establishing a defined-benefit pension plan to substantially increase your tax-deductible retirement-plan contributions. As a result of the repeal of the Section 415(e) retirement-plan limits, your practice can make substantial defined-benefit plan contributions without regard to amounts contributed or accumulated under prior defined-contribution plans.
Tax-planning strategy
24
If your practice currently is operating two defined-contribution plans (profit sharing and money-purchase pension), consider merging these two plans into a single plan to maintain the maximum annual allocation for the doctor ($30,000), while eliminating the additional legal, accounting, and administrative expenses incurred in operating two plans.
Tax-planning strategy
25
Fund nondeductible IRA accounts for the doctor and spouse in 2000 ($4,000 total) and on Jan. 1, 2001 (another $4,000), 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.
Tax-planning strategy
26
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.
Tax-planning strategy
27
Employ children age 6 or older through your practice where feasible to fund college savings, private school costs, etc., on a tax-deductible basis. Each child can earn $4,400 in 2000 and $4,550 in 2001 tax-free, in exchange for services actually rendered.
Tax-planning strategy
28
Establish a Roth IRA for each employed child and contribute $2,000 to each of the children`s accounts immediately and again on Jan. 1, 2001. While these contributions are nondeductible, all future earnings will be tax-free when withdrawn after age 591/2.
Tax-planning strategy
29
Convert each child`s regular IRA account into a Roth IRA when they reach age 14. While the proceeds of the regular IRA account will be subject to current federal and state income taxes, all future proceeds will grow tax-free.
Tax-planning strategy
30
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 per year during the initial two years) and Lifetime Learning Credit ($1,000 educational tax credit during the remaining years, increasing to $2,000 beginning in 2003).
Tax-planning strategy
31
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 who are age 14 or older.
Tax-planning strategy
32
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.
Tax-planning strategy
33
Increase the rent charged to your practice for use of the professional office building and/or equipment to the highest reasonable rate. By doing this, you can withdraw funds from the practice payroll tax-free and increase the income shifted to lower-tax-bracket children where this property is owned by an FLP, LLC, or Subchapter S corporation on behalf of the children.
Tax-planning strategy
34
Have the family FLP or LLC purchase all new equipment needed for the practice with its existing funds. 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.
Tax-planning strategy
35
Consider utilizing all or a portion of the $675,000 estate-tax-exclusion amount now by making additional gifts, if you can afford to do so economically. This will produce tremendous income tax, estate-tax, and asset-protection benefits as outlined in our October 1994 newsletter.
Tax-planning strategy
36
Take advantage of the annual gift-tax exclusion and split-gift election in order to make tax-free gifts of $20,000 per year to each child or other recipient. Utilize valuation discounts to the greatest extent possible, in order to increase the value of the tax-free gifts which can be made.
Tax-planning strategy
37
Transfer funds available for personal savings into the family limited partnership in future years to take advantage of the annual gift-tax exclusion, split-gift election, valuation discounts, and increases to the unified transfer tax credit to move these assets, as well as future income and appreciation, out of your estate tax-free.
Tax-planning strategy
38
Name your FLP or LLC as beneficiary of your share of assets under the wills of each spouse`s parents. This will effectively allow you to avoid death taxes on up to $1 million of assets through this generation-skipping transfer, while allowing you to have control over the funds through your status as a general partner or managing member.
Tax-planning strategy
39
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.
Tax-planning strategy
40
Pay all charitable contributions and donations personally, rather than through your professional corporation, to assure full deductibility. You should eliminate the accounting category for "charitable contributions" and "donations." Any practice expenditure made from which you may derive a future benefit should be classified as "advertising and promotion," while expenditures without the expectation of a future benefit (charitable contributions) should be made personally.
Tax-planning strategy
41
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.
Tax-planning strategy
42
Convert nondeductible interest on personal loans into fully deductible status through paying off debt using a home-equity line of credit or consolidating loans as part of a home-mortgage refinance package to take advantage of lower home-mortgage interest rates.
Tax-planning strategy
43
Accelerate personal tax deductions by paying any state-estimated income tax payments due in January before year-end; if incorporated, increase your state income tax withholding on your corporate salary before Dec. 31.
Tax-planning strategy
44
Accelerate personal tax deductions by prepaying your home-mortgage payment due Jan. 1 and by paying all real estate and personal property taxes due before Dec. 31.
Tax-planning strategy
45
Check with your accountant to make sure that the 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 to assure that you will not be liable for any underpayment penalties or increase your final federal estimated payment, if unincorporated.
Tax-planning strategy
46
Consider selling personally owned stocks or bonds that have declined in value before Dec. 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.
Tax-planning strategy
47
Defer taxes on capital gains from the sale of publicly traded stocks and bonds by rolling over the proceeds within 60 days into a "specialized small-business investment company" certified by the Small Business Administration (SBA).
Tax-planning strategy
48
Consider investing in qualified small-business stock and holding it for at least five years to exclude 50 percent of the future capital gains from income. Defer new investments in mutual funds for the rest of the year to avoid paying taxes on year-end capital gains distribution.
Tax-planning strategy
49
Utilize the child-care tax credit available for expenses incurred on behalf of all children under the age of 13. A tax credit equal to 20 percent of the lesser of the child-care expense or the lowest earning spouse`s wages is available for federal income tax purposes. Expenses for day care, babysitting, etc., all qualify for purposes of this credit.
Note: The tax laws in some states vary on points contained in this article. Check your state`s tax laws.
This article was reprinted with permission from The Blair/ McGill Advisory, a monthly newsletter devoted to tax, financial planning, investment, and practice-management articles exclusively for the dental profession. For more information on The Blair/McGill Advisory, call (704) 424-9780.
