Tax Planning Is More Complicated, and Necessary, Then Ever

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Medical practices are looking for ways remain profitable in these uncertain times. Tax planning now can be a critical tool to help physicians weather the storm and meet their financial goals. Here are some things to consider.

Uncertainty about the economic future is a common concern of most businesses these days.

Medical practices are looking for ways to weather the storm and remain profitable. Tax planning can be a critical tool to help businesses meet their financial goals, but the current state of uncertainty has made this time tested process more complicated than ever. Contacting your tax advisor and getting the process started now could provide clarity on the practice’s financial position and would allow for modifications to be implemented as many undecided issues are resolved.

For tax practitioners, tax planning will soon become clear as Congress resolves many of the stalemates currently under debate. The Bush tax cuts are set to expire at the end of 2010 -- if not extended, many tax rates will likely increase in 2011. There is a growing belief the Bush tax cuts may be extended to avoid another recession, but even if the cuts are extended in the short term, major changes to the tax code and rates are still possible. The need to generate new tax revenue sources to fund government programs could still alter rates going forward.

Until tax advisors know what future rates will be, it is difficult to advise practices on planning opportunities available to minimize tax liability. If rates increase in 2011, practices may want to recognize as much revenue in 2010 as possible and defer expenses until 2011. This contradicts the historical school of thought, which is to minimize revenues and maximize expenses.

Tax rates are not the only factor influencing tax planning; evaluating various aspects of the practice (and its owners) will also influence planning. The size and structure of the practice will determine what planning options may be available. Is the practice a pass-through entity (S corporation or Limited Liability Company)? A Professional Corporation (P.C.) or Professional Association (P.A.)? Smaller practices and practices structured as pass-through entities will look to the individual owner’s tax position to evaluate the tax-planning opportunities; while larger practices may be limited in planning opportunities due to different tax rules. Some owners may be subject to alternative minimum tax, which could minimize the benefit of some tax planning options. As the variables influencing tax planning are identified and evaluated, your tax advisor will need to analyze the variables in conjunction with current and future projected income and deductions.

The current year activity of the medical practice will also have a large impact on the tax planning opportunities available. Does the practice need to upgrade equipment, invest in an electronic medical record system or renovate the office space? These could all provide planning opportunities to meet tax and financial goals. Evaluating the expenses and revenue sources may also present some potential savings not identified during the normal course of business.

The 2010 tax-planning process is filled with uncertainty. To ensure that your financial goals are met, contact your tax advisor today to get the process started. While your advisor will not have all the answers regarding which techniques to utilize to provide the most benefit to your practice, they will be able to lay the groundwork for the financial and tax position of the practice. This groundwork will allow for modifications and fine tuning later in the year when many of the unresolved tax issues are finalized.

Melissa Pitchford is a shareholder at KatzAbosch, P.A., in Timonium, Maryland. KatzAbosch is a leading provider of accounting, tax and consulting services to the medical community. Melissa is also a proud member of the National CPA Health Care Advisors Association, a nationwide network of CPA firms devoted to serving the healthcare industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com. To learn more about KatzAbosch, or the topic discussed in this article, Melissa can be contacted at mpitchford@katzabosch.com or (410) 828-6432.