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After you file your taxes, your tax saving possibilities don't end. Discover how you can continue to save.
Tax-reducing possibilities for the 2012 tax year do not end with the filing deadline for you or your practice. Several strategies exist that make it possible to postpone that deadline, whether it is March 15, April 15, or another date required by the use of a fiscal year.
Under U.S. tax laws, you must complete a transaction before the end of the tax year for it to have an effect on your tax bill. For example, your new equipment, examination room fixtures, or waiting room furniture will qualify for a tax write-off only if you made the purchase before the end of the tax year.
Fortunately, after the end of the tax year and even after the filing deadline, you can take steps to correct mistakes made on already-filed returns, delay the filing deadline (but not payment), reap the benefit of losses after the fact, improve your practice’s cash flow by claiming certain casualty losses and, surprisingly, change the type of entity under which your practice operates. Here are seven options that may help you at tax time.
REQUEST ADDITIONAL TIME. You may obtain an automatic 6-month extension in which to file your personal tax return by using individual tax return form 4868 (Automatic Extension of Time to File U.S. Individual Tax Return). Doing so requires a proper estimate of tax liability.
Incorporated medical practices may obtain an automatic 6-month extension to file income tax returns by submitting tax return form 7004 (Application for Automatic Extension of Time to File Certain Business, Income Tax, Information, and Other Returns). You also may use this form to obtain a 6-month extension for filing other returns, including those related to excise tax, income tax, and information.
The automatic 6-month extension to file also applies to the returns of pass-through entities such as partnerships, S corporations, and limited liability companies (LLCs).
Remember, however, that an extension to file is not an extension of time to pay. And don’t forget to pay the tax bills mandated by your state and local governments.
AMEND YOUR TAX RETURN. All is not over merely because a deadline has passed. If you discover that a tax bill is incorrect after you file your tax return, you can make changes on an amended tax return. But why would anyone want to change or amend an already-filed tax return?
The Internal Revenue Service (IRS) encourages taxpayers to correct or amend any return because of errors, omissions, mistakes, or overlooked deductions. The IRS also expects you to amend your tax return to report additional income, although it acknowledges that few taxpayers do so. The IRS assures taxpayers that changing their minds about previously reported deductions or income will not increase the likelihood of an audit.
Generally, you may change your mind about previously reported income and deductions within 3 years of the time you file your return or within 2 years of the time you fully paid the tax, whichever is later. Should the refund claim involve the deductibility of bad debts or worthless securities, the period is 7 years.
Individuals such as solo practitioners may use tax return form 1040X (Amended U.S. Individual Income Tax Return). An incorporated medical practice that filed tax return form 1120 may use tax return form 1120X (Amended U.S. Corporation Income Tax Return) to file an amended return, whereas S corporations and partnerships may check a box on tax return forms 1120S or 1065, respectively.
AMEND YOUR ELECTRONICALLY FILED TAX RETURN. If you use the IRS’ electronic filing program to file an amended return, you will have already electronically filed your original tax return.
Therefore, the easiest process for electronically filing the amended return will be to update the underlying original return with the items that changed. After you update your return with your changes, attach the required documents along with any other supporting explanations, check the amended return box, and electronically file the material as an amended return.
Under the rules for electronically filed returns, an amended return is any return filed subsequent to the originally filed or superseding return and filed after the expiration of the filing period (including extensions). The electronically filed amended return mirrors the paper amended return filing, that is, it is a subset of information from the original return. For tax return forms 1120 or 1120S, your medical practice should include the main form and any changes that you made.
MAKE ADDITIONAL ADJUSTMENTS. Current tax laws also provide relief from some of the inequities caused by the statute of limitations and other provisions that would, in the words of U.S. lawmakers, “otherwise prevent equitable adjustment of various income tax hardships.”
In other words, adjustments may be permitted even though the limitation period for assessment or refund for the year at issue may have expired, but only where an adjustment:
CHOOSE A NEW BUSINESS ENTITY. A good example of potentially tax-reducing actions that you can undertake after the close of the tax year involve the so-called check-the-box regulations. These regulations allow physicians and their practices to re-examine the type of practice entity currently used. That’s right-regardless of how you formed or operate your practice, you can choose the type of practice entity you wish to use for tax purposes.
For example, not only can a partnership choose to be treated as a corporation-separating the partners from the practice-but the members of those increasingly popular LLCs can choose to be treated as either a corporation or a partnership for tax purposes. And best of all, you can accomplish this simply by checking a box on your tax form each year.
Although incorporated medical practices cannot take advantage of the check-the-box rules, for all others the flexibility provided by the check-the-box regulations offer year-long planning opportunities.
AVOID FAILURE-TO-FILE PENALTIES. You will be assessed a costly failure-to-file penalty for missing the filing deadline. You may avoid this penalty if “reasonable” cause exists. The IRS and the courts accept few excuses as reasonable cause, however.
For example, in a case brought before the U.S. tax court a few years ago, a taxpayer blamed his failure to file tax returns on his difficulty obtaining bookkeeping and accounting services after his accountant stopped working for his practice. Although the record does not show conclusively when the taxpayer obtained the services of his new accountant, the tax court was quick to point out that the more fundamental consideration is that “every taxpayer has a personal and non-delegatable duty to file a timely return.” Difficulty finding a bookkeeper, accountant, or tax professional does not provide reasonable cause for untimely filing.
DO NOT OVERLOOK LOSSES. A loss from theft or embezzlement is generally deductible only for the tax year in which the loss is discovered. Special rules exist for losses that are the result of an officially declared disaster, however. You may use disaster losses to recoup taxes paid in the previous tax year. In essence, you may claim a casualty loss resulting from a declared disaster as a tax deduction in the year preceding the year in which the disaster actually occurred. (See “Tax relief for Hurricane Sandy victims.”)
Losses that occasionally result from operating a medical practice are among the most common reasons cited as net operating losses (NOLs). As practice entities that pass income, deductions, and credits to partners and shareholders, partnerships and S corporations generally cannot use NOLs. Partners or shareholders, however, can use their separate shares of the partnership’s or S corporation’s practice income and deductions to figure their individual NOL.
If a NOL is carried back to apply against taxes paid in previous, more profitable tax years, you may use either tax return form 1045 (Application for Tentative Refund) or tax return form 1040X (Amended U.S. Individual Income Tax Return). Refunds are faster using form 1045, but you have less time in which to file it.
You may use tax return form 1045 to apply a NOL to all carryback years. Filing form 1045 results in a tentative adjustment of tax in the carryback year. If the IRS refunds or credits an amount from form 1045 and later determines that the refund or credit is too much, it may assess and collect the excess immediately.
Generally, you must file form 1045 on or after the date the tax return for the NOL year is filed, but not later than 1 year after the end of the NOL year. If the last day of the NOL year falls on a Saturday, Sunday, or holiday, the form will be considered timely if postmarked the next business day.
If you do not use form 1045, you may use form 1040X to get a tax refund because of an NOL carryback. If you use form 1040X, however, you must use a separate form 1040X for each carryback year to which the NOL is applied. You must file form 1040X within 3 years after the due date, including extensions, for filing the return for the NOL year.
MORE TAX CHANGES TO COME
Late last year, many tax experts were predicting that the resolution of the congressional stalemate over the fiscal cliff, the tax cuts proposed by President George W. Bush, and tax reform might involve three so-called “tax seasons.” The original tax return for the physician or his or her practice, an amended tax return to take advantage of provisions retroactively made for the 2012 tax year, and another amended return when the IRS issues the tax regulations that inevitably follow changes in the law.
Uncertainty is, admittedly, another factor that might conceivably warrant a request for an automatic 6-month extension of time in which to file your tax return. But once the dust settles and the changes have been digested and evaluated, taking advantage of even retroactive benefits is possible given all of the options that exist under both the new and old tax laws.
NEVER-ENDING TAX SEASON
Many medical practices are under a great deal of pressure to continue cutting costs, including taxes. This pressure coincides with an increased scrutiny of tax returns on many government levels.
On a similar note, the financial or operational strengths of every transaction you make always should stand on their own, aside from any tax benefits you derive from them. It is always a good idea to run all tax-related strategies, deductions, and transactions by the professionals your practice should be relying on.
Today, thanks to an extended time period in which tax returns can be filed and an even longer period in which to change or amend tax returns already filed, the so-called tax season has become a year ’round event. After all, what better time than right now to guarantee that you claimed all possible 2012 deductions for yourself and your practice while simultaneously incorporating new, overlooked, or ignored tax strategies into your 2013 tax plans?
Tax relief for Hurricane Sandy victims
Did you and your practice feel the effects of Hurricane Sandy? The Internal Revenue Service (IRS) will assist taxpayers who live in the areas of Connecticut, Maryland, New Jersey, New York, and Rhode Island officially declared disaster areas (for a comprehensive list of locations, visit www.irs.gov/uac/Newsroom/Help-for-Victims-of-Hurricane-Sandy).
If you have any questions, the IRS encourages you to call 866-562-5227 to speak with specialists trained to handle disaster-related tax issues.
If you lost your tax documents in the storm , you can use form 4506 (Request for Copy of Tax Return) to request back copies of your previously filed tax returns and their attachments, including W-2 forms.
You also can order transcripts that show most of the line items on your previously filed tax returns. Visit www.irs.gov/Individuals/Order-a-Transcript, call 800-908-9946, or use form 4506T-EX (Short Form Request for Individual Tax Return Transcript) or form 4506-T (Request for Transcript of Tax Return).
The IRS offers a Disaster Resource Guide for Individuals and Businesses (www.irs.gov/pub/irs-pdf/p2194.pdf) that tells you how to claim unreimbursed casualty losses on property that Hurricane Sandy damaged or destroyed, offers tips for reconstructing your records, and provides disaster relief resources.