Tax Tips: Business expenses

January 20, 2006

Your practice provides a wealth of write-offs. Read this to make sure you get every single one.

This is the second in a six-part series. In each article, you'll find advice from an experienced CPA on how to work the tax code to your advantage to trim your bill come April 17.

Whether you're a sole practitioner or you practice in a large group, you know how costly it is to operate your practice. In fact, there are so many expenses, it's easy to forget some of them. Yet these expenses provide a host of juicy tax deductions-whether you claim them on Schedule C or on a corporate tax return. (If you're an employee, see page 30 to find out what tax breaks are available to you.) Here's what you need to know.

The basics

Typically, the next largest category is rental and lease expenses. The rent for your office is deductible as are payments for equipment that you lease. If, instead, you own your office, you can deduct mortgage interest, as well as condo expenses, such as management fees and monthly maintenance.

Another major category is medical and office supplies, all of which are deductible. You can also deduct repairs and maintenance on computers, equipment, and the office.

Premiums for malpractice, property, and liability insurance are deductible as well as taxes on property, personal property, and business licenses.

Does your practice use outside services, such as accounting, electronic billing, legal and payroll service, postage and delivery, or professional consultants? These are deductible expenses, as well.

Don't forget to write off business development and travel costs and also what you spend on marketing, advertising, promotions, meetings, and special events.

Other deductions it's easy to overlook: monthly charges for internet service, hospital dues, subscriptions and publications, gifts to a maximum of $25 per person, licenses, telephone, triage service, beepers, and office utilities.

New laws and rules

If you rent your office and did some remodeling in 2005, you're in luck! You can take advantage of a special 15-year depreciation schedule that became available after Oct. 22, 2004 and ended Dec. 31, 2005. (Under the old rule, you'd have to depreciate those improvements over 39 years.) Just remember that these "leasehold improvements" must be interior improvements.

It's still possible to get a sizable first-year writeoff on an SUV you put in service in 2005. Here's an example: One of my clients paid $65,000 last year for a heavy SUV (defined by the IRS as weighing over 6,000 pounds) that she uses exclusively for her practice. On her 2005 return, she can expense the first $25,000 of the purchase price, and she's also allowed a regular depreciation deduction of 20 percent of the remaining $40,000 (or $8,000). So her total first year writeoff is $33,000. She can recover the remaining $32,000 in 2006 and later years under the general depreciation rules. (There's no bonus depreciation in 2005, as there was in previous years.)

Another change in the allowance involving your car: The IRS standard mileage allowance went up from 40.5 cents to 48.5 cents for the four final months of 2005. So if you use the IRS mileage allowance, take advantage of these higher writeoffs for business miles you put on your car starting in September 2005. (Just remember that you can use the mileage allowance only if you elected it the first year you used the car for business purposes. If you didn't, then you deduct actual car expenses.)