Complying with federal tax rules cost Americans $265 billion in 2005, or 22 cents per dollar collected.
Despite that financial burden, those same laws can also ease the financial “bite” you face when compelled to make changes to your practice or to the way you operate.
These changes can be lumped into several categories:
- Access for the disabled,
- Intangible assets,
- Inventories, and
The costs of making improvements to any business asset, regardless of whether those changes were mandated or not, is a capital expense, because the improvements often add to its value, or adapt it to a different use. New electrical wiring, a new roof, new plumbing, bricking up windows to strengthen a wall, and lighting improvements are all capital expenses.
However, you can currently deduct or write off repairs that keep the property in normal, efficient operating condition. Reconditioning, improving, or altering the property as part of an overall restoration plan are generally capitalized — but not always.
Access for the disabled
The Americans with Disabilities Act, which passed in 1990, requires businesses to make their premises more accessible to disabled, handicapped, and elderly patients, as well as employees.
The Act also contains tax deductions that affected businesses can use to reduce their out-of-pocket expenses for making needed improvements.
Costs paid or incurred to completely renovate or build a facility, or to replace depreciable property in the normal course of business, do not qualify for this expense deduction.
But you can deduct up to $15,000 each year, the cost of removing architectural, communication, physical, or transportation barriers that prevent your practice from being accessible or usable by disabled and elderly individuals. You also have the option of a reduction of the operation’s tax bill rather than a deduction from its taxable income.
All eligible small practices and businesses, those with fewer than 30 employees or gross receipts of less than $1 million last year, are entitled to a tax credit for expenditures to make the premises accessible to disabled individuals. The amount of that credit is 50 percent of the amount of all eligible access expenditures from $250 to $10,250 each year.
Changing a lease
Sometimes, franchise organizations, government bodies, the courts, or your patients mandate changing your practice’s lease. Whether you modify an existing lease or negotiate a longer term, these changes may require the payment of additional amounts of “rent” over part of the lease period.
Unfortunately, you cannot deduct payments made to modify or change a lease, even if they are described as rent in the agreement. But, you can capitalize those payments and deduct them over the remaining period of the lease.
If you make permanent improvements to leased property, you can depreciate the costs of those improvements over the recovery period for the property. You cannot, however, amortize them over the remaining term of the lease.
Special tax rules exist when property is destroyed, stolen, condemned, or disposed of under the threat of condemnation. In these situations, you normally report gain from an involuntary conversion of business property and deduct losses on your annual tax return for the year
Depending on the type of replacement property, you may not have to report the involuntary conversion. You would not report, for example, a gain on an involuntary conversion in which the property is replaced with property that is similar or related in service or use to the converted property.
You can defer your tax bill if you buy a qualifying replacement property within a certain time period if you receive other property or money in payment, such as insurance or a condemnation award that is not similar or related in service or use to the involuntarily converted property. The basis in the new property will be the same as the basis, or book value, in the converted property.
At the root of the tax law’s financial helping hand are the basic tax rules for abandonment or obsolescence losses. Under the tax rules, you can claim a loss for the abandonment of any depreciable asset such as a broken chiropractic table, a pollution-producing business vehicle, and the building that houses the practice.
The abandonment loss is the figure listed on the practice’s books for the abandoned property and its adjusted basis.
Your practice must, in the words of our lawmakers “manifest an irrevocable intent to abandon (discard) the asset, so that it will neither be used again by the taxpayer nor retrieved for sale, exchange, or other disposition.”
The impact on the intangible assets is often overlooked when changes are required. Our tax rules generally classify intangible assets as the practice’s “good will” — covenants not to compete, leases, patient lists, and even so-called “workforce in place.”
Intangible assets are not ordinarily tax deductible unless they have been “acquired,” such as when buying a new practice or negotiating a lease. Often times, you have already written off the time and expenses invested in creating the intangible assets as ordinary business expenses.
If, however, that intangible asset has a value on the practice’s books, should the practice fold, a lease be lost, or a patient list become outdated, the practice can quickly claim a loss deduction for abandonment. That loss deduction equals the amount shown on the books for that intangible asset.
As in any practice, inventoried supplies, goods, or products become dated, obsolescent, or merely unusable. Whether you use the “cost” or the “lower of cost or market” methods to value your inventories, inventoried goods that become unsalable or unusable should be valued at bona fide selling price, less the cost of selling.
You can perform a valuation adjustment, on a reasonable basis but not less than scrap value, for unsalable or unusable inventory items.
One of the most annoying changes facing you — and your practice —may be a change in the accounting method which the IRS may mandate to better reflect income and expenses.
A change in accounting methods can encompass the way various types of income are treated or expenses tracked, and the time when you enter income or expenses on the books — but does not include corrections of mathematical or posting errors or errors in computing tax liability.
An accounting method change involves adjustments to income in the year of the change because it might result in bunching of income. If the adjustments increase taxable income by more than $3,000, you may apply two methods of limiting the tax in the changeover year.
The tax increase in the year of changeover is limited to the tax increases that would result if the adjustments were spread ratably over that year and the preceding tax years. For this limitation to apply, the old method of accounting had to have been in use in the two preceding years.
Government entities, landlords, suppliers, or even your patients may demand changes. Fortunately, our tax rules contain a variety of provisions to enable every practice to not only comply with those mandated changes, but in many cases, substantially reduce the out-of-pocket costs of that compliance.
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.