Issue 11 - September 2003

Benefiting from losses
Tax deductions can ease the burden of losses

As you build your practice, most of your efforts are focused on ways to increase your income. That’s the natural way to boost profits. But you may find that you can boost your bottom line in another way — by taking full advantage of losses you may have incurred during the year.

Income tax rules are pretty straightforward in denying tax write-offs for lost profits. However, those same tax rules permit deductions for many of the other types of losses encountered by the average chiropractor — or his or her practice. Properly used, those loss deductions can ease or reduce the financial burden.

Any loss sustained during the taxable year not covered or “made good” by insurance or some other form of compensation can be claimed as an income tax deduction — provided that it is a “closed and completed transaction” (no other reimbursement remains outstanding, such as an insurance claim).

Casualties and disasters
Losses arising from fire, storm, flood or other casualty are, clearly, tax deductible. Of course, even casualty losses must be due to a sudden, unexpected or unusual event in order to qualify.

If the casualty loss is the result of a legitimately declared “disaster”, it can, in some circumstances, be utilized to recoup taxes paid in the previous tax year. Your accountant can best advise you how to treat the deduction.

To calculate the amount of a tax-deductible casualty loss, the fair market value (FMV) of the property is used. In other words, the tax deduction is limited to the actual loss resulting from damage to the property — not an overall decline in property values.

Alternatively, the cost of repairs to the damaged property is acceptable evidence of the loss of value.

Involuntary Conversions
Far more common than disaster losses are those occasions when business property is taken, legally or illegally. The government may, for example, legally take property by the simple act of “condemnation.” Losses of property through actions outside your control are usually labeled involuntary conversions.

These actions are unusual in that they often produce a gain. The local government that condemns your office building is required to reimburse you. That reimbursement frequently exceeds the book value of the property, resulting in a taxable gain.

Fortunately, the rules governing involuntary conversions permit the property to be replaced with property of a “like kind,” eliminating the need to report and pay taxes on that gain. Instead, the value of the old “lost” property is transferred to the new, postponing the taxable gain to some date in the future.

Abandonment
Finally, some losses you can control. Quite simply, a loss is allowed for the abandonment of an asset used in or by the chiropractic practice.

If a depreciable asset loses its usefulness and is abandoned, the loss is equal to its adjusted value. Obviously, the abandonment loss must be distinguished from anticipated obsolescence.

If an nondepreciable asset is abandoned following a sudden termination of its usefulness, a loss is also allowed in an amount equal to its adjusted value. This applies to the abandonment of an enterprise, as well as to the abandonment of intangible assets, such as contracts.

Lost profits rarely result in a legitimate tax deduction. For most other losses, however, tax deductions exist. Are you benefiting from the losses of your chiropractic practice?

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.