When it comes to write-offs, Americans haven&t hesitated to test the limits of what the IRS might allow. Physicians are no exception.
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When it comes to write-offs, Americans haven't hesitated to test the limits of what the IRS might allow. Physicians are no exception.
Every year, in an attempt to even the score with the Internal Revenue Service, taxpayers depreciate and deduct as much as they can. Some of themphysicians includedwill go to almost any lengths.
For instance, more than one doctor has tried to deduct the entire cost of his daughter's wedding, on the basis that he invited referral sources to the reception. A neurosurgeon sought to write off the full cost of his auto leasea whopping $2,500 a month on a $100,000 carfor trips to a hospital where he had privileges. Never mind that the distance from his office to the facility was barely 3 miles.
"He didn't seem to understand that the IRS would have no mercy on him in an audit," recalls James A. Kimble, an accountant and practice management consultant with Gilmore, Jasion & Mahler of Toledo. An IRS agent, he says, wouldn't believe for a second that a $100,000 car was used solely for business. "But I did agree to put the lease amounts on the doctor's tax return if he could show us a valid log of his business mileage and expenses."
The surgeon thought about it for a day or two, then bagged the idea.
"I wasn't surprised," Kimble says. "Few physicians maintain a complete log." Many doctors do only a small amount of deductible business travel, he says, because their offices are at or near the hospital. "Nevertheless," says Kimble, "this doesn't deter some physicians from wanting to deduct 90 percent or more of a very expensive car."
In a separate case, a family physician decided to write off the cost of meals and lodging for weekend visits to his son's college. The FP's wife, who's a corporate officer of the practice, also went on these trips. The doctor told his accountant that the visits had a legitimate business purpose: to meet with physicians in the same town as the college to review cases and attend to other clinical matters.
His accountant made the deductionthen sent the FP a letter. "We made it clear that we were taking the deduction based on his statement that, if audited, he could produce supporting documentation," says accountant and practice management consultant David C. Scroggins of Clayton L. Scroggins Associates in Cincinnati. "Our letter also said that if he couldn't support the deduction, he could be subject to taxes, interest, penalties, and possible fraud action."
Some physicians have gotten even more creative. "I had an internist client who wanted to deduct the cost of his Rolex watch, which he said was necessary to keep accurate time when taking pulses," says Kimble, who explained to the doctor that a cheap watch could do the job just as well.
"The bigger problem is that the IRS considers a watch 'mixed use' property," adds CPA Robert G. Baldassari, a principal with Matthews, Carter & Boyce in McLean, VA. "That means it has both business and personal uses." Baldassari says it's fine to take write-offs for expensive itemsgood-quality office furniture and lab coats, for instanceas long as they're used exclusively in your practice.
A doctor who asked Jim Kimble to depreciate the cost of a camcorder and a 35-mm camera couldn't prove those items passed that test. "He said he'd bought them to document medical conditions," the accountant recalls. "We might have been able to substantiate the claim if the cameras had been left in the office at all times, but this client said he was storing them at home, for 'safekeeping.' " Specialists who have a legitimate need to use photographic equipmentplastic surgeons and dermatologists, for examplewill be in a stronger position to defend a deduction for it than will primary care physicians, says Harvey Susnick, a CPA with David Berdon & Co. of Jericho, NY.
Other physicians have asked their tax preparers to depreciate pricey home-entertainment systems, which the doctors said they needed to view educational videos. "Clever," says Kimble, "but I don't think an IRS agent would believe that a taxpayer's three teenagers aren't allowed to watch that TV." Other medical professionals can be just as eager to push the envelope. St. Petersburg, FL, accountant Kevin M. Burkart tells of a veterinarian who wants to set up Roth IRAs for his two infants. Burkart told him he couldn't do that unless the kids had earned income, but the father wasn't deterred. "He's thinking about creating a quarterly newsletter for his practice and using the kids as models in photographs with pets," says Burkart.
"We'd have to determine how much infants typically earn from modeling shoots, so that the compensation reported on each W-2 isn't out of line," he continues. "As long as each kid doesn't earn more than $4,550the standard deduction for a single taxpayerthe earnings won't get hit with federal tax. And as long as the payment is reasonable, these accounts should pass IRS scrutiny." (However, such a setup may not escape tax completely: Depending on state law and the corporate structure of the practice involved, FICA taxes and state income taxes may apply.)
Although it might be difficult to pay an infant $2,000 a yearthe maximum you can contribute annually to a Roth IRAyou have more options once your children reach school age, says Bob Baldassari. "Kids can do simple filing, stuff envelopes, empty trash cans, and refill containers with cotton balls, tongue depressors, adhesive bandages, and the like. If they work several hours a week, they can easily make $2,000 a year."
Dennis Murray. Sorry, Doc, your Rolex isn't deductible. Medical Economics 2001;3:85.