Don’t overlook last-minute tax savings

There are still some steps you can take to reduce your 2003 tax bill.

If you’re inclined to let your accountant do all the worrying about your business and personal income taxes, you could be making a costly mistake.

“Your accountant may be the tax expert, but no one knows the fine details of your finances as well as you do. That’s why your accountant needs your help to hold your income taxes to a minimum,” said Tom Normoyle, CPA, from suburban Philadelphia.

Filing deadlines for your 2003 tax returns are still months away, but you have only until Dec. 31 to do all you can to maximize tax reductions. Following are some steps you can take now to slash your 2003 tax bill.

Accelerate payments, defer income

Tax experts agree that accelerating payment of bills and deferring income wherever possible are among the most effective ways for you to reduce current year taxes.

“If you’re a cash-basis taxpayer, prepay as many of your practice-related bills as possible by Dec. 31. Prepaying your office real estate taxes and certain advertising and promotion costs and anticipating supply needs can effectively reduce current year’s taxes,” said Paul Rich, CPA, of the Siegel Rich division, Rothstein Kass & Company.

Mr. Rich suggested to consider buying needed supplies and stationery for next year before December 31. Also, pay any outstanding bills before year-end. If you don’t have the cash, you can borrow or use your credit cards. The IRS allows you to take the deduction in the year of the charge; you don’t have to wait until you pay the bill to take the deduction.

Other practice expenses that lend themselves to prepayment are state and local taxes, professional fees and insurance. If you’re paying estimated taxes, make your fourth-quarter state tax payment by Dec. 31 rather than in January.

Mr. Rich also suggests that you donate office equipment not being used to a nonprofit before the end of the year. Be sure to get a receipt and an estimate of the fair market value of the goods you donate. If you’re audited, no receipt means no deduction.

Note that 2003 is the last year that a C-corp. practitioner can take an increased deduction for donating used computer equipment to a school or library. Instead of throwing out the old equipment, you can donate it and take a deduction equal to its cost basis, plus one-half of its market value limited to twice its basis.

If 2003 has been a good year for income in your practice and your accounting is on a cash basis, you can reduce this year’s taxes by delaying collecting of monies due you until after Dec. 31. For example, you could consider giving your December patients an extra month to pay for services you provide between now and the end of the year. You could also slow collection calls or send statements a week or so later than usual.

Exploit the new tax laws

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), signed by President Bush on May 28, creates some significant tax breaks. Whether you structured your practice as a professional corporation, partnership or sole proprietorship, JGTRRA’s incentives affect you. All of the provisions affecting businesses are effective retroactively, either to Jan. 1 or May 6, 2003.

“JGTRRA has opened up a number of tax savings possibilities,” said Cheryl Pimlott, CPA, tax manager for Rothstein Kass. “But the biggest tax break for medical practices is the Section 179 deduction, which allows you to deduct the full cost of assets in the year of purchase up to a defined limit.”

The new law increases the Section 179 deduction from $25,000 to $100,000. Purchases made right up to Dec. 31 qualify for this huge 2003 tax break. In addition, off-the-shelf computer software is eligible for the Section 179 deduction for the first time.

“Bonus depreciation introduced in 2002 increased the maximum first year depreciation on automobiles to $10,710 from $7,660 effective May 6, 2003,” said Ginita Wall, CPA, of San Diego. “Purchases up to Dec. 31 qualify for bonus depreciation, but only if you use the car 50% or more for business.”

Remember that the maximum deduction is based on your percentage of business use. For example, if you use your car 80% of the time for business, the first-year deduction is limited to $8,568 (80% of $10,710).

In addition to creating opportunities to lower this year’s taxes, JGTRRA makes basic changes that could also affect how you operate your practice in the future for tax purposes. For example, the new law may make it worthwhile to re-examine your choice of business entity.

JGTRRA reduces individual marginal tax rates, while keeping corporate rates the same. That change will tend to make partnerships and limited liability companies more attractive. At the same time, a maximum dividend tax rate of 15%, combined with a top corporate rate of 35%, leaves a potential 50% tax on income earned at the corporate level.

“While the new tax laws have incorporated many tax breaks, they are now more complicated than ever,” Ms. Wall said.

She suggested that every physician consult with his or her tax advisor to determine how to take maximum advantage of the changes.

Save more for retirement

Make sure you’re contributing the maximum to your 401(k) or other tax-deferred retirement plan. If not, adjust your savings before year-end.

In recent years, the IRS has increased contribution limits and made it easier than ever to put more money away to fund your retirement years. You have until April 15, 2004 to make an IRA contribution for 2003. Except for the new Roth IRA, all contributions to your retirement plan are tax deductible.

“A company has until the due date of its tax return, including extensions, to make contributions to a qualified retirement plan. However, the account must be opened by Dec. 31 in order to get the tax deduction and tax credit,” Ms. Pimlott said.

Open new retirement plan

“If you have employees and no retirement plan, you might want to set one up before Dec. 31 to take advantage of the tax credit of 50% of the cost of establishing and/or maintaining the plan. The credit, available for each of the first 3 years, is limited to $500 per year,” said Carol I. Katz, CPA, of Baltimore.

Use IRS Form 8881 for this purpose, but the procedure is tricky, so consult with your tax advisor before proceeding.

Combine business, pleasure trips

Did you make any trips that combined business and pleasure this year? If more than half your time was devoted to business, you can deduct transportation costs as well as all directly business-related expenses. If more than half your time was spent on pleasure, the cost of transportation will be disallowed.

Of course, if the trip was entirely for business purposes, such as attendance at a seminar or continuing education (related to your medical practice), professional association convention or trade show, all expenses associated with the trip may be chalked up to business expense.

“Many business travelers don’t keep adequate documentation for travel expenses. As a result, they risk losing out on deductions,” Mr. Rich said.

Documentation for travel and entertainment should include the business purpose and such details as where, when and who you were with, and a receipt for any expense over $25.

Personal car, business deductions

Even if you used your personal car for business only on occasion, you may deduct the costs of maintenance and operation for the business-use portion.

In figuring your auto expense deduction, you may use either actual expenses or the standard mileage rate. Many tax advisors suggest that you or your accountant calculate your auto deduction both ways and use the method that gives you the biggest deduction.

When you use actual expenses, you can deduct the business portion of car expenses including depreciation, gas and oil, insurance, licenses, parking and registration fees, repairs, tires, tolls and even garage rent.

Under the standard mileage rate for 2003, you may deduct a flat $0.36 per business mile, down from $0.365 per mile in 2002.

Financed purchases

If you bought any office equipment or supplies on your credit card or with a business loan, you may deduct those purchases this year even if you won’t pay off the loans until later. While you’re at it, don’t forget to deduct any of this year’s interest costs on the loans themselves.

Balance investment gains, losses

This has been a volatile year for personal investments. Some did poorly while others rebounded nicely. By selling appreciated assets and liquidating underperforming investments, you may match gains and losses to minimize your personal income taxes.

If you have sufficient losses to offset your gains, you may deduct the losses this year on sales completed by Dec. 31. Note, however, that tax rules limit the amount of excess capital losses you can use to offset ordinary income to $3,000.

If your net loss totals more than $3,000, don’t worry. You can carry forward the losses over $3,000 every year until you use them up.

Before the end of the year, make charitable contributions that you would normally make early in 2004. That way, the charity gets the money early and you get a deduction on your personal taxes.

Of course, you can’t rearrange your personal and business affairs to accommodate every twist and turn of the tax laws. Still, whittling down your payment to Uncle Sam every year is worth the effort. If you can cut just $1,000 off your tax bill each year and invest that money in your tax-deferred retirement account, after 20 years you’ll have added considerably to your nest egg. Remember that this is a deferral mechanism; after retirement, payments from these accounts are taxable.

For Your Information:

• Tom Normoyle, CPA, can be reached at 3880 Blake Rd., Huntingdon Valley, PA 19006; (215) 947-3241; e-mail: tpnorm@aol.com.
• Paul Rich, CPA, can be reached at Siegel Rich Division of Rothstein, Kass & Company, 1177 Avenue of the Americas, New York, NY 10036; (212) 997-0500 ext. 2735; fax: (212) 730-6892; e-mail: prich@rkco.com.
• Cheryl Pimlott, CPA, can be reached at Rothstein, Kass & Company, 85 Livingston Ave., 2nd Floor Roseland, NJ 07068; (973) 994-6666; e-mail: cpimlott@rkco.com.
• Ginita Wall, CPA, can be reached at 10863 Vereda Sol Del Dios, San Diego, CA 92130; (858) 792-0524; e-mail: gwall@planforwealth.com.
• Carol I. Katz, CPA, can be reached at Leonard J. Miller & Associates, 425 St. Paul Place, Baltimore, MD 21202; (410) 539-4600; fax: (410) 539-7267; e-mail: carolkatz@lenmiller.com.