Financial strategies: Opportunities in year-end tax planning

December 25, 2015

Don’t wait until April 15 to focus on tax planning for yourself and your practice. Here’s how to get off to a positive start on the 2016 tax season.

Because many physicians face increasing financial pressure, proactive and legal tax minimization planning is more important than ever. Unfortunately, many physicians often ignore this issue until either late in the year or just before the April 15 filing deadline when short time and high sales pressure can lead to mistakes, additional losses, or even inadvertent tax fraud committed by you, the taxpayer. For high-income doctors, taxes are something to plan for.

Nothing in a column like this should ever be considered tax advice, so use this only in the way intended: as suggestions of what to review with your own advisers. Act today on the following suggestions to avoid missing opportunities to save money or asking questions that could help you avoid a major financial mistake.

Relationship check

The first step is actually having an accountant. The second step is to consider the difference between a good accountant and a great accountant; yours needs to be sharper than ever. A technically proficient CPA should understand and maximize your basic deductions and accurately calculate your tax liability.

A better accountant does all that and explains every legal means for reducing your tax bill and helps you plan for it. This should include understanding basic qualified plans (such as an individual retirement account) and the pros and cons of complex ones such as defined benefit plans, captive insurance companies, and Section 79 plans.

 

Estimate liability

Work with your CPA now to estimate what you owe and the (hopefully) excess cash you will have to fund any of the tax planning ideas they propose.

Too many doctors wait until April 14 and then are surprised. While it’s important to contribute as much as you can to the right tax plans, be sure to avoid ending up in a cash flow crunch. Always consider the minimum cash reserves you will need to pay both predictable fixed expenses and to have a reasonable liquid emergency fund.

Consider deferral opportunities

If the review indicates you will be in a higher (or in some cases, lower) tax bracket because of income and compensation fluctuations, it might make sense to take more (or less) income now to minimize your tax liability. Examine the possible benefits of deferring or adjusting bonuses, receivables, and income and see if your tax adviser can make it work given the numbers and your corporate structure or lack thereof.

Pay down fixed expenses

If your estimate includes a significant tax liability, consider making December payments on your predictable fixed early 2016 expenses. Ask about deductions for expenses such as insurance, maintenance, rent, supplies, marketing, utilities, and equipment upgrades (including office technology) as well as recurring bills to vendors and service providers. Some detail-oriented CPAs also advise doctors who consistently have significant travel expenses for professional education to purchase tickets and hotel rooms and pay fees now.

 

Watch receivables and collections

Cash flow and collections directly affect liquidity and your ability to implement the tax planning your advisers suggest. Aging receivables are every practice’s worst enemy and counting on patient collections at the holidays is a losing game, as is dealing with third-party payers who are closed for long stretches over the holidays. Increased vigilance and efforts on both fronts will give you the greatest number of options.

 

Ike Devji, JD, helps protect over 4,500 clients with nearly $6 billion in personal assets, including thousands of physicians. Send your financial questions to medec@advanstar.com.

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