A number of chiropractors tend to fall into tax problems each year, which can easily result in paying more than they should
The good news: business tax amounts are lower than they have been in years. In fact, this number hasn’t been this low since 2011, when the total amount of business taxes paid was $242 million, jumping to $281 million in 2012. Between 2012 and 2017, the taxes paid remained over $300 million annually, even approaching $400 million in 2015.
The Internal Revenue Service (IRS) collected almost $3.5 trillion in taxes for the 2018 fiscal year. Of this amount, the large majority was individual, estate, and trust income taxes, with approximately $262.7 million being paid as business income tax.
The bad news: a number of chiropractors tend to fall into all-too-common tax problems each year, which can easily result in paying more than they should. What are these traps and, perhaps more importantly, what can you do you avoid them in your practice?
1. Not keeping good enough records
“Your accountant (and the IRS if you’re ever audited), can only know what you’ve recorded and shown them,” says Michael Eckstein, EA, owner of Eckstein Advisory.
If you don’t have proof of your expenses, you can’t make the most of your deductions. Incomplete records also begin a snowball effect as “bad records lead to bad tax returns which lead to bad audits,” says Eckstein.
Keeping good records involves keeping track of receipts for expenses paid, noting services charged and paid, and recording any other monies coming in and going out. Software can assist with this and avoiding tax problems.
“Cloud accounting software has made huge strides in the last few years,” says Eckstein. “By leveraging accounting and recordkeeping software, you can streamline your bookkeeping process, produce better management reports, and create a robust audit trail.”
2. Not choosing the right accounting method
There are two methods of accounting service-based providers such as chiropractors can use explains Thomas J. Williams, EA, tax accountant, award-nominated author, and co-founder of Deducting the Right Way®, an online resource for do-it-yourself entrepreneurs who are ready to tackle their business finances. They are the accrual method and the cash method. What’s the difference?
“With the accrual method, invoices become income whether or not the patient pays by the due date,” explains Williams. “But you can write off the invoices when they’re uncollectible. For the cash basis method, you don’t recognize income upfront, but you cannot deduct unpaid invoices.”
There are advantages and disadvantages to both. For instance, Intuit Quickbooks shares that some of the advantages of cash accounting include a simplified bookkeeping process and you don’t pay taxes until payment has been received. Disadvantages of cash accounting include being somewhat incomplete financially because it doesn’t account for all of your incoming and outgoing monies, it doesn’t provide solid recordkeeping of actual dates of sales and purchases, and it doesn’t conform to Generally Accepted Accounting Principles (GAAP), which is why it cannot be used if you report more than $25 million in sales.
A few pros of the accrual accounting method include painting a more complete financial picture to avoid tax problems and conforming to GAAP. Yet, choosing this option is also more complex, which means more time and paper to track, while also not being so good for providing a good short-term view of your finances.
So, which method is best? “You must decide which way works better for you,” says Williams.
3. Not creating the best structure for your current practice
The third most common tax problems trap chiropractors can fall into is not creating the best structure tax-wise for their current practice. And even if at one time you had the best structure, this can change.
“Successful chiropractors should consider LLC S corporation status,” says Randy Tarpey CPA, principal owner of Sickler, Tarpey & Associates. LLC stands for Limited Liability Company and S corporation is short for “small business corporation,” which is a pass-through entity when it comes to taxes. How is this potentially beneficial for chiropractors?
“A proper reasonable compensation study and a smooth transition to an LLC should save significant extra annual cost in self-employment taxes,” says Tarpey, adding that “LLC tax planning for your future opens the door to junior partners and members in the future as well.”
If you choose to remain a sole proprietor, Tarpey warns that the IRS has 1099 deposit information from medical billing. It also has credit card deposit information from credit card transactions using 1099-K and tracks the chiropractic industry by the SIC code listed on your sole proprietor tax filing (Schedule C).
Because of this, “all deposits should be recorded,” says Tarpey, “and deviations from the industry norms may increase the likelihood of an IRS audit.”
All advisers will tell small business owners that if you’re handling taxes on your own, and it’s overwhelming or you think you’re missing deductions, talk to an adviser about options and advice.