Tax planning is legal — and good business
By Mark E. Battersby

As the end of the year fast approaches, you may find yourself caught between the proverbial rock and a hard place. The uneven economic recovery is placing pressure on everyone — chiropractors and chiropractic practices alike — to continue cutting costs, including taxes.

In this age of high-profile corporate shenanigans, the whole idea of tax planning often takes on darker overtones. Tax planning, however, is legal, while scheming to keep your tax bill or that of your practice at a minimum is neither illegal nor a bad thing.

Despite the increased scrutiny faced by many businesses and the complexity of our tax laws, tax planning itself does not have to be overly difficult.

A PLAN FOR PLANNING

The objective of tax planning is to structure your financial transactions in such a way as to maximize either your practice’s or your after-tax wealth. This is not always the same as minimizing the bite of taxes.

Depending on their individual circumstances, you can employ a number of legitimate strategies before year’s end to balance things to 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 will not come in until the following year.

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

• Acceralating payments. Whenever possible, prepay deductible business expenses, including rent, interest, taxes, and insurance. With the cash method of accounting, most expenses are deductible in the year they are paid for. All that is required may be a business purpose for the prepayment (for example, locking in a price, anticipating a scarcity, etc.).

• Making large purchases before year end. Close the purchase of depreciable business equipment or real estate within the current year.

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

• Speeding up depreciation. Elect to expense or immediately write off the cost of new equipment instead of depreciating it.

PLAN PROFITS

Our tax system has graduated tax rates that increase along with the income of the chiropractor and his or her practice at various levels. Thus, one strategy for saving taxes means reducing your tax bracket.

The owners of many closely held chiropractic practices have traditionally tried to extract funds in the form of compensation, rather than as dividends. They now have a new option: Compensation will still receive a corporate-level tax deduction while dividends will not.

Compensation, however, will continue to be taxed at rates as high as 35 percent at the individual level, while dividends will now be taxed only at 15 percent.

One planning strategy might involve finding some method other than compensation to reduce the incorporated practice’s tax bill. Retirement-plan contributions and interest deductions are two options. This simple strategy, combined with a return to paying dividends to shareholders, might offer the best of both worlds. And, yes, such strategies are legal.

By beginning the tax planning process now, you can legitimately deduct benefits that would otherwise be classified as nondeductible personal expenses such as purchasing health insurance, investing for retirement, or providing perks such as a company car through the practice. These perks, however, require planning.

TIMING IS EVERYTHING

Although the end of the year signals the last chance for you to balance the timing of income and deductions between the current and upcoming year for maximum tax advantage, you can implement strategies early next year.

For example: If income is up this year but expected to be down next year, you might want to postpone asset sales or other unusual transactions that might generate a profit until next year, when the additional profits will not be quite as likely to put the operation into a higher tax bracket.

Naturally, what you can do depends a great deal on the accounting method you use in your practice. A cash-basis chiropractic practice generally deducts expenses as paid and receipts become income when received — or made available.

An accrual-basis practice or business realizes income when billed and expenses when incurred.

Year-end tax planning should also include a review of your practice’s current form of doing business.

With certain exceptions, a corporation operating as an S- corporation does not pay federal corporate income taxes. Instead, S-corporate income, losses, deductions, and credits “pass through” to the principals to be reported on their tax returns. Thus, S-corporation income generally is taxed only once — to the shareholders — unlike C-corporation income, which is taxed twice — once to the corporation and again to the shareholder as dividend income.

Do not forget that dividends paid from an incorporated chiropractic practice are temporarily taxed at a rate of only 15 percent.

Like a corporation, a limited liability company (LLC) provides its owners with protection from personal liability for business debts and obligations. But most LLC owners can choose to have their practices treated as partnerships for income-tax purposes.

Partnership treatment means:

• Income, losses, deductions, and credits pass through to the individual owners to be reported on their individual income tax returns;

• LLC income is not subject to double taxation; and

• An LLC can specially allocate income and expenses among its owners to the same extent that a partnership can.

Although the Internal Revenue Service may occasionally disagree, you should keep in mind that the courts strongly back every taxpayer’s right to choose the course of action that will result in the lowest legal tax liability.

Tax planning, therefore, is a process of looking at various tax options in order to determine when, whether, and how the chiropractic practice should handle transactions so that taxes are reduced or even eliminated.

However, tax planning should not be the primary motivation for any transaction. In fact, the most critical “best practice” in tax planning is ensuring that the “tax tail does not wag the dog.” In other words, the strength of every business transaction, large or small, must stand on their own, aside from the tax benefits that may be derived from them.

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 your professional advisor about issues related to your practice.