Doctors of chiropractic use the term subluxation to depict the altered position of a vertebra and subsequent functional loss that determines the location to perform a spinal adjustment.
For most chiropractors, when it comes to the subject of taxes, financial subluxations are the lack of effective tax planning. This, in turn, creates financial loss and pain.
- Are you satisfied with the taxes you pay?
- Are you confident you are taking advantage of every available break?
- Is your tax advisor giving you proactive advice to save on taxes?
If you are like most chiropractors (and most small business owners), your answers are “no,” “no,” and “huh?”
And if that’s the case, there’s some bad news, and some good news.
The bad news is you’re right. You do pay too much in taxes—maybe tens of thousands more per year than the law requires. You are almost certainly not taking advantage of every tax break available.
The tax code is thousands of pages long, with tens of thousands of pages of regulations. There are volumes of court cases interpreting all those laws, regulations and guidance. The sad reality is that there is probably no one alive taking advantage of every tax break they’re entitled to, simply because there are so many of them out there.
And most tax advisors aren’t proactive when it comes to saving their clients’ money. They put the “right” numbers in the right boxes on the right forms, and file them by the right deadlines. Then they call it a day. They record the history you give them, but wouldn’t you prefer someone to help you write that history?
The good news is you just need a better plan—a legally and ethically sound one. You’ve already taken a giant step in that direction, whether you realize it or not, because owning your own practice is one of the biggest tax shelters left in America.
You make choices that make an inpact on your tax bill every day. Are you making the right ones that optimize your financial picture? Or are you leaving money on the table instead? Consider the following mistakes most DCs make.
Failing to plan
It doesn’t matter how good you and your tax preparer are with a stack of receipts on April 15. If you don’t know you can write off your kid’s braces as a practice expense, you are probably paying more taxes than you need to pay.
Tax planning gives you two powerful benefits you can’t get anywhere else. It’s the key to your financial defense. As a practice owner, you have two ways to put cash in your pocket: Going on financial offense, which means making more; and going on financial defense, which means spending less. Spending less is easier than making more.
Taxes are likely your biggest expense. So it makes sense to focus your financial defense on where you spend the most.
And tax planning guarantees results. You can spend time, effort and money promoting your practice—and that still won’t guarantee results. Or you can set up a medical expense reimbursement plan, deduct the cost of your teenage daughter’s braces, and guarantee savings.
But those guaranteed results start with planning. You can’t deduct money you spend on a medical expense reimbursement plan if you didn’t set one up in the first place.
The second biggest mistake is nearly as serious as the first, and that is fearing rather than respecting the IRS. Many chiropractors are simply afraid to take deductions they’re entitled to for fear of raising the proverbial “red flag.”
But what are your odds of being audited? Most experts say it pays to be aggressive. That’s because the odds of an audit are so low that most legitimate deductions aren’t likely to raise the IRS’s attention.
Never be afraid to take a legitimate deduction. And if your tax professional does recommend you shy away from taking advantage of a strategy you think you deserve, ask them to explain exactly why. And don’t put up with a vague reply that it will “raise a red flag.” Remember, it’s your money on the table, not theirs.
Wrong business entity
The third mistake is choosing the wrong business entity (or entities). Most chiropractors start as sole proprietors. Then, as they grow, they establish a limited liability company or corporation to help protect them from practice liability.
But choosing the right practice entity involves all sorts of tax considerations as well. Many chiropractors are operating as entities that may have been appropriate when they were established—they just don’t work as effectively now.
There are ways you can organize your business:
A sole proprietorship is a practice you operate yourself, in your own name or trade name, with no partners.
A partnership is an association of two or more partners.
A C corporation is a separate legal “person” organized under state law.
An S corporation is a corporation that elects not to pay tax itself. Instead, it files an informational return and passes income and losses through to shareholders according to their ownership.
A limited liability company (LLC) or limited liability partnership (LLP) is an association of one or more “members” organized under state law.
If you operate your practice as a sole proprietorship, or a single-member LLC taxed as a sole proprietorship, you may pay as much in self-employment tax as you do in income tax. If that’s the case, you might consider setting up an S corporation to reduce your exposure.
If you’re taxed as a sole proprietor, you report net income on Schedule C. You’ll pay tax at whatever your personal rate is. But you’ll also pay self-employment tax, and you’re subject to a Medicare surtax on anything above $200,000 if you’re single, $250,000 if you’re married filing jointly, or $125,000 if you’re married filing separately.
Now, you still must pay yourself “reasonable compensation” for the service you provide as an employee (i.e., the salary you would have to pay an employee to do the work for you). If you pay yourself nothing, or merely a token amount, the IRS can re-characterize up to all your income as wages and hit you with hefty taxes, interest, and penalties. Don’t get greedy. Still, according to IRS data, the average S corporation pays out about 40 percent of its income in the form of salary and 60 percent in the form of distributions.
While reading this, you’ve probably found some things you aren’t doing as effectively as possible. Maybe you’re operating your practice as the wrong entity type or you haven’t done any real planning at all. Most haven’t, because they don’t realize how important it is.
There are more than 25 common mistakes chiropractors make and these are just three of them. Isn’t it about time you stop settling for just recording your past financial history? It’s time to look at your taxes with new eyes and build a comprehensive plan that helps you accomplish your goals in the most tax-efficient way possible.
Don Rasmussen is a Certified Tax Strategist (CTS), a Chartered Advisor in Philanthropy (CAP), and a tax reduction strategist who’s worked with individuals, businesses and charities around for over 30 years. He’s helped them make informed decisions, avoid costly mistakes, maximize tax efficiency, lower their taxes, and find money falling through the cracks, all without changing their CPA. He can be contacted through quartermastertax.com.