Ignore deductions for tax savings
By Mark E. Battersby

Why would you want to ignore perfectly good, legitimate tax deductions? Our tax laws offer a degree of flexibility that permits you to manipulate both income and deductions legitimately to achieve a consistently low tax bill.

Deferring or postponing the receipt of income in a tax year when profits are up often results in a lower tax bill for both that year as well as in later years when income can be offset by a larger-than-usual amount of deductions.

Surprisingly, the lowest tax bills often result from legitimate tax deductions postponed or ignored.

HANDLING DEDUCTIONS

Here are some ways to handle deductions:

• Start-up deductions. If you are starting up a practice, you have the option of deducting up to $5,000 in start-up and organizational expenditures in the year you open your doors. But why would you want to? If your practice has income, it will likely find itself in the lowest tax bracket. If you ignore those start-up expenses in the first year, they — and any start-up expenses that exceed $5,000 — will be available for deduction ratably over the following 180 months.

Thus, the $5,000 deduction deferred until later, more profitable years, will help reduce income that, in all likelihood, will be taxed at a higher rate than it would as a start-up.

• Natural-disaster claims. Businesses and chiropractic practices damaged by a hurricane or other disaster often have an incentive not to claim deductions and thus report higher pre-catastrophe income. Higher pre-catastrophe income can lead to higher federal assistance and insurance settlements from damages due to loss of income.

• Third-party income review of income potential. You might also ignore otherwise legitimate deductions and report a higher income in some situations that involve a third party — a potential investor, creditor, or buyer — who has requested copies of your practice's tax return to access the income potential of the operation.

You do not have to volunteer to a third party additional expenses that were not reported on your tax return. Omitting expenses in financial statements is a violation of generally accepted accounting principles (GAAP); however, small businesses do not always use GAAP-basis financial statements. Tax laws, as mentioned, do not require claiming all deductions for tax purposes.

RECOVERING COSTS

Every practice claims a depreciation write-off for capital assets including the building that houses your practice, the furniture or fixtures within that building, and the equipment used by the operation. These write-offs allow you to recapture the cost of the asset over time.

Ways to recover the cost of assets include these:

• Short useful life. The tax rules allowing for the recovery of amounts spent for equipment do not match tax depreciation with economic depreciation. The write-off period for newly acquired capital assets differs greatly between the period when the building, fixtures, or equipment will contribute to your practice's profits and what our lawmakers label an asset's "useful" life.

• Accelerated depreciation. In addition to shorter "useful life," write-off periods, the tax rules encourage investment in practice assets by allowing accelerated depreciation methods.

• First-year write-off. Our tax laws also encourage investing in assets by allowing an expensing allowance — first-year write-off — of up to $100,000 of the cost of newly-acquired equipment under Code Section 179. (Remember, however, neither accelerated depreciation nor the first-year write-off are mandatory.)

• Accrued depreciation. Although depreciation deductions do not have to be claimed, they do "accrue" and figure in the computation for gain or loss when property is sold, abandoned, or otherwise disposed of.

• Straight-line depreciation. It is also possible to ignore the standard system of depreciation, choosing instead a slower, more even write-off, such as the straight-line method.

The IRS reportedly looks more closely at any business choosing an alternative depreciation method such as straight-line depreciation for newly-acquired property rather than using the no-questions-asked modified asset cost recovery system (MACRS).

THE OTHER SIDE OF THE COIN

Ignoring or postponing tax deductions is only one strategy and may not always be the correct one for your practice. Frequently, your practice may need more, not less, currently deductible expenses. In this case, consider "prepaid" expenses.

Yes, even cash-basis chiropractic practices may deduct certain prepaid expenses in the year paid. If the payment creates an asset having a useful life extending substantially beyond the end of the tax year in which paid, the expenditure may not be deductible, or may be deductible only in part, in that year.

If, for example, your calendar-year practice signs a three-year business property lease on December 1 of the tax year and agrees to pay an "additional rental" of $18,000 plus monthly rental of $1,000 for 36 months, you can deduct only $1,500 for the tax year ($1,000 rent plus 1/36 of $18,000). The $18,000 is an amount paid for securing the lease and must be amortized over the lease term.

Ignoring perfectly legitimate tax deductions is not an easy habit to break. However, matching the available tax deductions with your practice's income can, if handled properly, increase the value of the deductions while ensuring a tax bill consistently in the lowest possible tax bracket.

A fluctuating economy combined with a tax system that takes progressively larger bites as taxable income increases often means deductions may be worth more next year than today. Or, on the other side of the coin, an exceptionally profitable year might warrant claiming every tax deduction the chiropractic practice is entitled to or postponing income to reduce the current tax bill.

The strategy is "tax planning." Tax planning is a year around activity that reaps big rewards — and consistently low tax bills — year after year.

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.