Issue 1 - January 2004

Finance & taxes by Mark Battersby
Branching out with a tax deduction

Branching out is not always easy. Many chiropractors have expanded their practices or entered into what might be perceived as an unrelated business endeavor without a thought given to the deductibility of the costs. Be aware, however, that the federal tax laws spell out what can and cannot be deducted or written-off when expanding your practice or venturing into new fields.

The tax rules make it pretty clear that the opening of another store by a grocer is merely an “ordinary and necessary” expense of the grocery business so long as the new store is also a grocery. When it comes to a wholesaler opening a retail outlet, a business creating an e-business on the Internet or a chiropractic practice expanding into what is, for them, a new field, the picture is not as clear. All too often the IRS may argue that the new operation is not “related to” the current business or practice.

Our tax laws favor the phrase “related to.” For example, for teachers, professionals or even chiropractors, deducting the expenses of continuing education is permitted if it is related to their present profession and doesn’t qualify them for a new trade or profession.

Similarly, a chiropractic practice is allowed a tax deduction for all ordinary and necessary expenses — so long as those expenses are related to the current operation.

Why the big deal? Although the ordinary and necessary expenditures of a business are tax deductible, start-up expenses and organizational expenditures are not deductible. They are general capital expenditures.

Taxpayers with business start-up costs can elect to amortize, or write off, those expenses over a period of 60 months, starting with the month in which the business begins. Any chiropractor who doesn’t elect that route must capitalize the expenses. The only impact of that capital asset will be on the gain or loss that results when the practice is eventually sold or otherwise disposed of.

In The Beginning

Relying on the theory that there cannot be a business expense until there is a business, our lawmakers created limited, spread-out write-offs for start-up and organizational expenditures — costs normally spent or incurred before a chiropractic practice begins operations or opens its door for business. The ordinary and necessary expenses of carrying on a practice are deductible in the year paid or incurred.

A chiropractor who opens the same type of practice at another location does not necessarily incur start-up costs. Even if that new location is in another state and requires the formation or registering of a new name or incorporation papers, the costs could be labeled as either the immediately deductible legal expenses of an on-going chiropractic practice or as start-up expenses for a new, unrelated enterprise. It is all based on the label attached to the expense and how it is viewed by the tax authorities.

What are Business Start-up Costs?

Start-up costs are those incurred in setting up an active practice, trade or business or investigating the possibility of creating or acquiring such an operation. They include any amounts paid or incurred in connection with that potential business. For example, they may include:

• A survey of potential markets;

• An analysis of available facilities, labor, supplies, etc.;

• Advertisements for the opening of the practice;

• Salaries and wages for training employees;

• Travel and other necessary costs for securing prospective referring organizations, suppliers or patients; and

• Salaries and fees for office managers, consultants or other professional services.

Since these costs and expenditures usually apply to a business venture that has not yet begun practicing, the only avenue to recover them is amortization. Amortization allows the chiropractic practice to deduct start-up and organizational costs in equal amounts over a period 60 months or more.

To compute the actual tax deduction, a chiropractic practice divides the total start-up or organizational costs by the number of months in the amortization period. This can be any period of time longer than the 60 months prescribed by the tax rules. The result is the amount deductible each month — beginning with the month the practice opens its doors to patients or business operations begin.

The Decision

After deciding whether the new operation will be tagged as an expansion of the existing chiropractic practice or as the start-up of a new, slightly different practice or business, the next potential area of disagreement with the IRS usually involves those initial expenses which — while not ordinary and necessary — do not qualify as start-up expenses, such as expenses for a preliminary “due diligence” investigation.

In one situation the IRS determined that only expenses incurred in the course of a general search for, or preliminary investigation of, a business are amortizable as start-up expenses. Once a taxpayer makes the “whether and which” determination after preliminary investigation of a business, all costs incurred to acquire the business must be capitalized.

Final Thoughts

The question remains whether the expenses of expanding a practice, entering a related field or venturing into a new arena by a chiropractor will be labeled as business start-up costs or as organizational expenses that must be amortized over 60 months or more.

As the ordinary and necessary expenses of an on-going chiropractic practice or business, those same expenditures may be legitimately deducted in the year spent or incurred.

While not overly specific, our tax laws take a limited view of what constitutes “ordinary and necessary” expenses of an existing practice or business. A chiropractor with an already-established — and profitable — practice may prefer an immediate write-off or tax deduction for the expenses of expanding or branching into greener fields. The IRS auditor might prefer the slower write-off — or no write-off at all — for what is viewed as the start-up of a new business unrelated to the old.

Thus, the chiropractor who can define the scope of his or her practice and demonstrate that it remains the same after expansion or branching out, will avoid potential problems in the future.

Obviously, the tax consequences of developing a multi-discipline/holistic wellness center warrant careful consideration. Due to the uncertainty and lack of specific guidelines, every chiropractor should seek professional advice before putting their plans on hold awaiting a definitive answer from the IRS.

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.