Why Pay Uncle Sam More Than You Have To?

It’s probably a fair assumption to say that what prompted you to become a chiropractor was not tax management and planning. For that reason, the following article provides useful information that will make it easier for you to keep more of your hard-earned income and pay Uncle Sam less.

There are several "tax shelters" or tax planning strategies that chiropractors can use as a tool for putting thousands of dollars back into their practice. Many of these tax tips are not well known, while others remain underutilized because practitioners don’t know how to fully use them to their advantage.

One easy place to start is reviewing capital expenditures or fixed assets carefully to ensure that you are not overlooking deductible expenses. Depreciation methods and lives vary depending upon how an asset is categorized, so mistakes can result in lost deductions.

If you are planning to buy or construct a new facility for your practice, pay close attention to how costs are classified. While commercial buildings and their structure components are generally depreciable over 39 years, equipment, furniture, fixtures and other tangible assets can be written off faster. If,however, you make these substantial purchases during the last quarter of the year, your depreciation deduction may be limited. Consult your CPA.

A few other less obvious deductions should also be considered.

The Section 179 deduction allows eligible businesses to deduct the full cost of annual asset acquisitions in lieu of depreciation. As much as $20,000 may be expensed for 2000, assuming your purchases don’t exceed $200,000. (If they exceed $200,000, other rules may apply.) The Section 179 deduction is also limited to the amount of taxable income from the tax payer’s active trades or businesses.

Beyond looking at depreciation, consider a retirement plan as one of the most powerful tax shelters still available to business tax payers. For a relatively small practice, the SEP Plan (Simplified Employee Pension) is one to consider, after discussing your strategies with your tax advisor.

Contributions to fund the plan are immediately tax deductible, assuming you designate the fund appropriately when you establish it and consult with your CPA about calculating the amount of your contributions. Plan investment earnings are tax deferred and plan participants — including owner/employees and self employed individuals — do not have to pay income taxes on plan benefits until they receive distributions.

Other deductions related to your practice may include automobiles and home-office related costs. Chiropractors can claim deductions for business-related use of automobiles by using the standard mileage rate method or the actual expense method. The question is what is the best method to use.

If you own and operate only one business vehicle, you should choose the method that yields the largest deduction. However, once you’ve claimed accelerated depreciation for a business car in prior years under the actual expense method, you can’t switch to the standard mileage rate method for that car in a subsequent year. The Internal Revenue Service now allows use of the standard mileage rate for a leased business car.

The standard mileage rate for business driving dropped to 31 cents per mile effective April 1, 1999. The rate for 2000 has not yet been announced.

If you use the standard mileage rate, you can separately deduct business parking fees and tolls, the business portion of state and local property tax and the business portion of the auto loan interest.

Like travel mileage, home office furnishings are another expense that can be deducted from your overall taxes. To do this you must use an area of your home exclusively and regularly as your principal place of business or as a place of business where you meet or deal with patients. A separate, unattached structure that you use exclusively and regularly in connection with business may also be eligible.

If you use a space in your home exclusively and regularly for administrative and management activities of your practice, you may be eligible for a home-office deduction. However, you can’t have another location outside of your home where you conduct substantial administrative or management activities of the practice.

Once you and your CPA have discussed and strategized your tax plans, think about one other thing--keeping tax records.

Keep tax returns indefinitely and retain the supporting records for at least six years.

In general, except for cases of fraud or substantial understatements of income, the IRS can only assess taxes within three years after the return was filed. For example, if you filed your 1996 individual tax return by its original due date of April 15, 1997, the IRS would have until April 15, 2000 to assess a tax deficiency against you.

If you filed your return late, the IRS generally would have three years from the date you filed the return to assess a deficiency. The problem with the three-year rule is that the assessment period is extended to six years if more than 25 percent of gross income is omitted from a return.

In addition, the assessment period does not begin to run until a return is filed. Therefore, if the IRS claims that you never filed a return for a particular year, it can assess tax for that year at any time, even beyond three to six years unless you can prove that you actually filed.

Additionally, records that relate to any property may have to be kept even longer than other tax records. Keep in mind that the tax consequences of a transaction that occurs in one year may depend on things that happened in earlier years. You should retain records that are measured from the year that the tax consequences actually occur.

The bottomline to these tips is this: to avoid paying more taxes than you need to pay, it is essential that you plan your tax strategy. Seek the advice and ongoing assistance of a certified public accountant who is not only a tax specialist, but one who focuses on practice management.

You may be amazed at the dollars you can save with proper planning and sound advice.

Anna M. Fink, CPA, and James C. Ellis, CPA, are partners in the accounting firm of Ellis & Associates CPAs, PA.The firm concentrates much of its service to practice management and taxes. They can be reached at 410-256-9298.