Operating a chiropractic practice with excellence demands much more than just administering treatments, managing staff and keeping patients happy.
Setting our businesses up for long-term success requires astute, intentional financial management and quality planning to ensure financial success both personally and professionally. This article provides key strategies to reduce taxes and grow wealth.
We all want our businesses to do well. However, doing well could equal more of our hard-earned income out the door in taxes. If you are on track for a profitable year, you need to be talking with your advisors now to strategically plan for your Q3 and Q4 profit, loss, estimated tax burden and potential tax savings opportunities.
While paying taxes is a normal part of personal and business responsibilities, we need to be wise stewards, optimize our tax situation and certainly not overpay. This allows for more dollars to be invested in the business. Proactive planning can improve our family’s quality of life and help us build long-term wealth.
Below are some strategies to reduce taxes and grow wealth, including common ideas regarding tax for chiropractic practices “savings,” some you may have heard and others may be new. I recommend you work closely with your personal advisors to see what best suits your situation.
End-of-year equipment purchases
It is common for business owners look to buy equipment at the end of the year to save on taxes; however, it is important to have a plan, including the ability and the staffing necessary to operate the equipment in order to further generate profit.
Buying equipment that is not 100% necessary
Although common sense tells us to only buy equipment if we truly need it, you’d be surprised at how many business owners spend tens of thousands of dollars on equipment they really don’t need just to save on taxes. There are better ways to spend money than buying unnecessary equipment. Keep in mind, any large expense should have an expected return on investment (ROI). Most equipment depreciates quickly. If you ever get in a cash crunch and must sell equipment, you’ll most likely get much less than you paid.
Remember, like any deductible business expense, you are still far behind from a cash-flow perspective when spending those dollars.
Example: You spend $50,000 on equipment/supplies, 100% of which is deductible. You are in the 40% marginal tax bracket, which means you have lowered your taxable income by $50,000 and that saves you $20,000 in income taxes. Good job. However, you just spent $50,000 to save $20,000 in income taxes. You are still behind $30,000 by making that purchase.
If you have planned for this expense with cash savings and have a legitimate need for the equipment, use your cash. Letting go of your cash to buy a machine will make you think hard about whether you truly need the item.
Getting a loan
Yes, a 100% full deduction, plus preserving cash by using a loan or line or credit can seem attractive; however, you must weigh in the interest, future payments and potential risks before doing so.
Keep in mind, financing everything presumes on the future, which is fine when things are going well, but risks, such as illness, injury, staffing changes that affect collections, economic downturn or any number of variables, can impact your business if you have a slow month or two. You’ll feel good if the economy slows and all your equipment is paid for (PF).
Business vehicle
Like equipment purchases, if you are looking to purchase a business vehicle at the end of the year, common sense would tell us not to take out an $80K vehicle loan just to save ~$25K in taxes. You’d be shocked by how many business owners go down this path. Yes, it feels good to reduce taxes, but then you owe $80K on a vehicle; and when the payments start next year, none of it is deductible, as you have already used your deduction. That payment over the next several years gets old fast. Again, keeping your strategies to reduce taxes and grow wealth top of mind is critically important.
Assuming a middle-of-the-road tax bracket, buy a truck you can afford to pay for in cash. Say it’s $30,000 as an example. This should save approximately $10-12,000 in taxes. Keep in mind, this hypothetical truck will need a bed at least six feet long to be fully deducted.
Prepaid accounts
If you run a cash practice and keep an escrow account, you can move prepaid credits from profit this year into next year, assuming the patient(s) have a credit on their account. As long as the prepaid services are fully refundable and are only prepaid 12 months in advance, they can be moved from revenue to a liability account. These dollars would then be moved to revenue at the start of the new year as services occur. End-of-year reconciliation with your accountant to review prepaid accounts can be an effective strategy.
Establish and contribute to a retirement plan if you qualify
A SEP IRA is one of the most common retirement plans for small businesses and is easy to open and maintain with some flexibility and minimal administrative hassle. It allows you to make significant contributions for yourself and your employees without the need for extensive paperwork or annual tax filings. Keep in mind, the contribution amount is limited to 25% of your W-2 wages. As an example, if you are paying yourself $60,000 in W-2 wages, you may be able to contribute ~$15,000 to a SEP IRA, which then lowers your income for that year.
A SEP IRA, or another retirement plan, is a fantastic way to both lower income taxes and build wealth. This is far better than buying unnecessary equipment. Every dollar contributed to a plan will lower your income taxes, the same as other deductions previously discussed, but will be invested and grow your personal net worth for your future spending needs.
Run all legitimate expenses through the business
You would be surprised at how many business owners commingle business funds with personal funds, even accidentally. It could be as simple as going to Costco and buying a few things here and there for the company but using your personal card. Be sure to run all legitimate expenses through the business. This will lower your taxable income; thereby, lowering your tax burden.
Conversely, buying personal items with business funds, such as vacations, cars not owned by the company or other expenses not business-related is a big no-no. Don’t use your business as a personal piggy bank.
Be sure all assets are on a depreciation schedule
Of course, big items like equipment, X-ray machines, etc., are common items to depreciate, but don’t forget about furniture, computers, monitors or TVs you purchase for the office. Remember to tell your accountant about each item you purchase throughout the year, as they’ll need their own depreciation schedule.
Estimated pass through entity tax payment
If it applies in your situation, consider prepaying taxes to your state in the form of a pass through entity (PTE) payment via the S-Corp. This can allow you to pay your personal state tax liability and deduct it from your federal income.
Remodeling
If you are considering a remodel at your office, any money you spend can be classified as leasehold improvements and can be fully depreciated in the year it is incurred.
Final thoughts on tax-planning strategies to reduce taxes and grow wealth
By implementing these mid-to-late year tax-planning strategies, DCs can more effectively manage their tax liabilities and optimize their financial position. From strategically purchasing equipment to leveraging depreciation while improving your personal net worth, these decisions play a crucial role in minimizing tax burden and maximizing savings. It is essential to consult with the proper professionals to ensure compliance with tax laws and regulations and make informed financial decisions tailored to your individual circumstances.
JAMY ANTOINE, DC, BCN, is a doctor of chiropractic with past specialties in peripheral neuropathy and severe disc damage. He has a more than 22 years history of investing, entrepreneurship and chiropractic business ownership. Due to his love of finance, investments and good financial behaviors, he retired from private practice and is now using his extensive business experience and knowledge working with The Wealth Group, a nationally renowned, comprehensive wealth management firm. He is a financial planner for DCs, business owners, entrepreneurs and motivated families. For more information, contact jamy@thewealthgroup.com, 615-395-8600 or visit thewealthgroup.com.
Disclaimer: The Wealth Group is a Securities and Exchange Registered Investment Advisor. No content contained herein should be construed as an offer of investment advice or an offer for the purchase or sale of any security, insurance or other investment product. Investments involve the risk of loss, including loss of principal. Please consult with a qualified financial, tax or legal professional before implementing any strategy presented here. Data presented here is obtained from believed reliable sources but cannot be guaranteed as to completeness or accuracy.
