Use tax write-offs to mitigate your compliance expenses.
Every chiropractor faces an overwhelming financial burden when attempting to comply with the industry’s regulations. Consider just a few of the relevant compliance laws, including the Dodd-Frank Act, Payment Card Industry Data Security Standard, the Sarbanes-Oxley Act, the Federal Information Security Accountability Act, and, of course, the Health Insurance Portability and Accountability Act (HIPAA).
Closer to home, many practices face compliance issues with continuing education requirements and staying up-to-date with state and local licensing and ordinances. Although compliance with these rules is rarely accompanied with direct financial compensation, our tax laws do on occasion provide a degree of relief.
Insurance woes
In 1996, HIPAA established standardized mechanisms for electronic data interchange, security, and confidentiality for all healthcare-related data. HIPAA’s Title I dealt with protecting health insurance coverage for people who lose or change jobs, while Title II simplified and standardized the requirements for healthcare-related information systems.
The Protecting Access to Medicare Act of 2014 prohibited the adoption of ICD-10 prior to Oct. 1, 2015. When ICD-10 kicks in, you will have to work harder on documentation. Systems capable of processing the new codes will need to be implemented, and your staff will require training.
Generally, the purchase of new computer software can be best compared to buying a business asset: If the software has an expected life of longer than one year, its cost can be written off or deducted over a 36-month period. When software comes with a computer, and its cost is not separately stated, it is treated as part of the hardware and is depreciated over five years.
Card compliance
You should also be aware of the penalties, fees, or threat of termination that can result from a failure to comply with a credit card company’s Payment Card Industry validation rules. Each credit card company has its own umbrella compliance program, usually based on the number of transactions for its credit card alone. Companies differ in their definition of levels and compliance validation submission requirements.
Because each level contains specific requirements, a practice may be a Level 4 merchant under Visa’s classifications. The same practice may be a Level 2 merchant according to American Express. The compliance validation requirement for a Level 3 American Express merchant is to provide quarterly scans. A Level 4 Visa merchant is only required to do so at the discretion of their acquiring bank.
When in doubt, assemble the number of transactions separated by credit card brand, contact your bank, and ask. Acquirer banks have the ultimate authority over their merchants’ levels, so should your practice suffer a breach at any time, your level may also be elevated.
Political write-offs
Our tax laws frequently help when battling city hall, though they are rarely effective in influencing lawmakers. In addition, contributions made to a political candidate or party are not deductible as business expenses, nor are lobbying expenses directed toward influencing federal or state legislation.
This prohibition does not generally apply to in-house lobbying expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are tax deductible.
Educational investments
Whether you are self-employed, an employee of your own practice, or strictly an employee, many educational and training expenses are both tax deductible by your practice and tax-free to the recipients.
You may deduct the cost of all ordinary and necessary expenses paid for employee education and training. You can also deduct the cost of education for your practice’s principals if it improves skills required by law for maintaining a practice. Continuing professional education is generally tax deductible by whomever foots the bill.
Property ammunition
Fighting a change in zoning rules to allow the operation of a practice can be quite expensive, but tax deductions can help reduce the out-of-pocket costs of the battle. Similarly, the expenses of fighting property tax assessments can be deductible and substantially reduce your property tax bill for years to come.
Any tax that is an assessment for local benefits such as streets, sidewalks, and similar improvements is not deductible by the property owner except where it is levied for the purpose of maintenance and repair or of meeting interest charges on local benefits. It is the taxpayer’s burden to show an allocation of amounts assessed for different purposes.
Accessibility tax credits
The 1990 passage of the Americans with Disabilities Act was one of the few that contained tax deductions and credits for businesses required to comply. If improvements are mandated to make your practice more accessible, unique write-offs can help trim the expense.
For example: Eligible practices are entitled to a nonrefundable income tax credit for expenditures to make the practice accessible to disabled patients and workers. The credit is 50 percent of the eligible expenditures that total between $250 and $10,250. Practices can also deduct up to $15,000 of the cost to remove barriers for handicapped or elderly persons.
Lease provisions
Expenses incurred to comply with a landlord’s demands can also be reduced. The expenses of renegotiating a lease can, for instance, be written-off or amortized as an intangible expense. Similarly, an amount paid by a tenant for cancellation of a lease on practice property is usually deductible.
And then there are improvements made to property leased by the practice. Unless a leasehold improvement qualifies as a 15-year leasehold improvement property (or qualifies as an improvement to a retail building or restaurant), the cost of additions or improvements made by the landlord or tenant that could be considered a structural component must be depreciated in the same manner and over the same period as the underlying property.
Property taxes paid by a tenant on behalf of a landlord are, at least for tax purposes, treated as additional rent.
Employee advantages
You don’t have to be a unionized practice to face demands made by employees or government agencies acting on behalf of workers. One tax break providing relief allows eligible small practices to claim a credit for qualified startup costs incurred in establishing and administering a benefit plan for employees.
The credit equals 50 percent of the qualified startup costs incurred for creating or maintaining a new employee retirement plan. The credit is limited to $500 in any tax year, but it may be claimed for qualified costs incurred in each of the three years. An eligible small business has fewer than 100 employees who received at least $5,000 in compensation in the preceding year.
Legal applications
A fine or penalty paid to the government for a legal violation clearly is not a tax-deductible business expense. An illegal bribe or kickback paid directly or indirectly to a domestic government official or employee is nondeductible.
The same applies to federal tax penalties; however, damage awards paid in connection with the violation of a federal civil statute and similar penalties may be deductible if they are compensatory rather than punitive.
The increasing financial burden of complying with the ever-growing number of rules, increasingly expensive fines, penalties, and new taxes can weigh heavily on you. Since few compliance programs come with provisions to help offset their cost, tax laws are often the only avenue of potential savings. Grasp onto these limited opportunities to soften the blow where you can.
Mark E. Battersby is a tax and financial adviser, freelance writer, lecturer, and author located in suburban Philadelphia. He can be reached at 610-789-2480.
DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional adviser about issues related to your practice.
