Now is the perfect time for veterinarians to start planning and finding ways to manage—and possibly reduce—tax liabilities. As a successful veterinarian, you will undoubtedly pay your share of taxes, but without a solid understanding of all the tax-benefit strategies available, you may be paying more taxes than you should.
Below is a selection of tax-saving strategies and best practices that veterinarians should consider reviewing and potentially implementing now and in the future.
Deferring Revenue & Accelerating Expenses
One of the most fundamental concepts of year-end tax planning is deferring revenue into the following tax year and accelerating expenses into the current tax year. For example, if you are going to purchase equipment, purchase this equipment in December versus January, whereby accelerating your deduction and taking advantage of bonus deprecation.
Additionally, review your payables and pay what you can in December instead of January. Most veterinary practices use the cash method of accounting, so when you receive money, it’s taxable revenue, and when you pay your expenses, the expenses are deductible.
Best Practice: Consider setting up a line of credit with your bank. Draw down on the line and pay additional expenses before year-end in order to reduce current taxable income. Use your January revenue to pay off the line of credit in January.
Qualified Business Income Deduction (QBI)
QBI is an often-missed deduction, and is also known as a “Section 199A” deduction. QBI is a tax deduction that allows eligible veterinary practices and small business owners to deduct up to 20% of their qualified business income. This is a significant tax deduction that you should be taking advantage of.
Best Practice: Manage the limitations and eligibility by carefully planning with respect to your entity structure, compensation and basis in assets.
Maintaining and contributing to a pension plan is a win-win situation. You receive a current deduction for your pension contribution, and at the same time, your monies are in a tax-deferred account growing and appreciating.
Best Practice: If you only implement one tax-savings strategy, make it a pension contribution.
Are you deducting all of your ordinary and necessary business expenses paid by your practice? These business expenses include, but are not limited to, dues, continuing education, licenses, computer, internet, advertising, phone, etc. Your practice’s reimbursement policy should follow the accountable plan standards to ensure deductibility. In short, under an accountable plan, an employer must comply with three standards:
- The expenses must have a business connection;
- The expenses must be substantiated within a reasonable period; and
- The employee must return any monies not spent to the employer, and within a reasonable period.
Best Practice: Make sure all income and deductions go through your business account and maintain a separate credit card for business purposes. Do not co-mingle personal and business expenses.
Consider employing a family member. Wages paid would be a current deduction to your practice and the family member could potentially offset the income with the standard deduction. And, in some cases, they could pay little to no tax. In certain circumstances, social security tax may not apply as well. The family member must perform ordinary and necessary work for the business in order to obtain a valid deduction.
Best Practice: Use the money paid to the family member to fund an IRC Section 529 plan for college or make an IRA contribution (subject to limitations and restrictions) on behalf of that family member.
Flow-Through Entity Tax Payment Options
In an effort to circumvent the current limitation of the state tax deduction at the individual level, some states have implemented programs in which state taxes can be paid at the entity level for flow-through entities, such as “S” corporations and partnerships. This tax is deductible on the federal tax return and avoids the deduction limitation of taxes on your personal income tax return.
Best Practice: Speak with your tax professional about these programs and make sure to take full advantage of maximizing your state tax deduction.
The type of entity you selected when you started your practice may be very different than the entity you have now. Tax laws have changed and your practice may have grown. Your entity selection also depends on the level of your income and whether you own or rent the real estate you practice in.
Best Practice: Prepare an income tax projection as if you were practicing under each entity and quantify and compare the tax ramifications of each.
If you are considering buying or selling a veterinary practice, there are several tax-saving strategies involved. Some of these strategies and concepts to consider include the following:
- Organization of the business
- Stock vs asset sale
- Allocation of purchase price
- Timing of sale or purchase
- How to handle the real estate
- Installment sale accounting and taxation
- Buy/sell agreements
Best Practice: When buying or selling a veterinary practice, it is imperative to seek advice from a qualified tax professional to help guide you toward making the best business and tax decisions.
In addition to implementing tax-saving strategies and best practices, veterinarians should also perform a self-financial check-up. Ask yourself these following questions, and if the answer to any of the questions is “no,” take immediate action to remedy:
- Do I have a will, power of attorney and a health care directive?
- Review business insurance and all insurance policies. Is there a need for an umbrella policy?
- Do I have, or more importantly, do I need life insurance?
- Am I meeting all of my state and local filing responsibilities?
- Is a retirement plan in place and is it sufficient?
- Does my practice have sufficient cash flow to continue operating?
- Is my cash working for me?
Best Practice: It is recommend that you review these questions at least annually.
Veterinarians are often consumed with patient, staff and daily business responsibilities, and in some cases, pay little regard to income tax planning. However, if income tax planning does not receive the immediate attention and action it deserves, tax-saving opportunities are missed. Make an effort to start your tax planning now. +