Issue 15 - December 2003

Finance & taxes by Mark Battersby
How to plan your taxes after the temporary cuts of 2003

Since the tax law requires transactions to be closed (completed) before the end of your practice’s tax year, now is the time to think about how to reduce your annual tax bill — not only this year, but also in future years.

At its most basic, tax planning is a process of looking at various tax options in order to determine when, whether and how to conduct business — and personal — transactions so that taxes are reduced or even eliminated.

Here are some things to consider as you do your tax planning:

Make the most of taxes in 2003

Our tax system has graduated rates that increase along with the income of the chiropractic practice. One strategy for saving taxes is to reduce the tax bracket of the chiropractic practice.

Obviously neither the chiropractic practice nor a principal can literally reduce the federal income tax rate. You can, however, take actions that will result in a similar effect. For example:

• Choose the optimal form of organization for the practice. Some organizational examples include sole practitioner, partnership, corporation, professional services corporation or S corporation.

Although not a year-end tax planning strategy, this option deserves attention in the overall tax-planning process, especially in light of the new 15 percent tax rate on dividends paid by some types of incorporated chiropractic practices.

• Structure a transaction to result in capital gains. Long-term capital gains earned by non-corporate taxpayers are subject to lower tax rates than other income.

• Shift income to a lower-bracket individual. Instead of paying a higher-bracket individual (such as you, the practice’s principal), pay a lower-bracket person. One fairly simple way to accomplish this is by hiring your children.

While the tax laws — and the rules of many professional groups and organizations — limit the usefulness of this strategy for shifting “unearned” income to children under the age of 14, some opportunities to lower tax rates still do exist. Remember, however, the time to think about those strategies is during the course of the tax year. If you think this strategy may be appropriate for you, be sure to talk with your accountant or tax advisor.

The goal is usually to reduce taxes this year. To be really effective, however, the tax bracket should be consistent year-after-year. If your income is up this year but expected to be down next year, you might want to postpone assets sales or other unusual transactions that might generate a profit until next year when the additional profits won’t be quite as likely to put the practice — or its principal — into a higher tax bracket.

Depending on your individual circumstances, you can take advantage of several legitimate strategies before year’s end to make sure you remain in the same bracket this year, next year and for many years thereafter. Those basic year-end savings strategies include:

• Delaying collections. Delay year-end billings or processing of credit card receipts until late enough in the year that payments won’t come in until the following year.

• Delaying capital gains. If the chiropractic practice is planning to sell assets that have appreciated in value, delay the sale until next year — if this can be accomplished without significantly reducing the price.

• Accelerating payments. Wherever possible, prepay deductible business expenses, including rent, interest, taxes, insurance and similar items. But also keep in mind that the tax rules limit tax deductions for some prepaid expenses.

• Accelerating large purchases. Close the purchase of depreciable personal property or real estate within the current year.

•  Accelerating operating expenses. If possible, speed up the purchase of supplies or services or the making of repairs.

•  Accelerating depreciation. Elect to expense or immediately write off the cost of new equipment instead of depreciating it. Remember the new Section 179 tax rules now permit every chiropractic practice to immediately deduct up to $100,000 in expenditures for new equipment as an expense.

Naturally, what you can do depends a great deal on your accounting method. A cash basis chiropractor, for example, deducts expenses as paid and receipts become income when received — or made available. An accrual-basis chiropractic practice realizes income when billed and expenses when incurred — regardless of when paid for.

Take advantage of tax credits

A tax credit is defined as a dollar-for-dollar reduction in the amount of tax that the principal — or his or her practice — owes. Unlike deductions that reduce the amount of income that is subject to taxes, a credit reduces the actual amount of tax owed.

What qualifies as a general business tax credit?

• Disabled access credit. Although years have passed since the Americans with Disabilities Act was made law, any eligible small business or practice is entitled to a nonrefundable, disabled access income tax credit for expenditures incurred in making the office accessible to disabled individuals.

The amount of this credit is 50 percent of the amount of eligible access expenditures for any year that exceed $250, but that do not exceed $10,250. And, your practice is eligible for this credit if it had either (1) had gross receipts for the preceding tax year that did not exceed $1 million or (2) had no more than 30 employees.

• A pension start-up credit. For tax years after 2001, if a practice begins a new qualified defined benefit or defined contribution plan (including a 401(k) plan, SIMPLE plan or simplified employee pension plan), it can receive a tax credit equal to 50 percent of the first $1,000 in startup costs.

Reduce taxable income

By beginning that tax planning process now, you may be able to legitimately deduct benefits that would otherwise be classified as nondeductible personal expenses. No chiropractor should, for instance, overlook the possibility of purchasing health insurance, investing for retirement or providing perks such as a company car through the practice. But perks, particularly those that benefit the principal or principals of a closly-held practice, require advance planning.

Despite any rumored changes to our tax rules, you should immediately begin thinking how to reduce your 2003 income tax bills using the rules now in effect. Undertake tax planning immediately, perhaps with professional assistance from your accountant or tax adviser.

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.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult you professional adviser for any issue related to your practice.