Your practice can do more to save on taxes and play more "games" with the IRS than an individual or an employee can. And we're not just taking about some extra deductions.
“A doctor’s practice is his or her most important tax shelter.”
That’s a statement I made in a recent article, and I have had a number of inquiries as to exactly what I meant. First of all, I may need to qualify the ground rules a little. If you are a W2 employee of a big hospital or super clinic, you don’t really have a practice. You’re an employee.
Your practice is a company
A practice is where you or two or three other doctors have a facility and provide medical services to patients. It’s a company. It is getting harder to have a traditional practice, but you may be able to jerry rig a “practice.”
If you are working for the hospital or super clinic, you may want to look into establishing a company (probably an LLC) and having the LLC contract with the hospital or clinic to provide your medical services. Some hospitals are actually forcing doctors to contract with them as an independent entity, because they want to stop paying the doctors benefits and providing insurance for them.
But before you jump into the deep end and start a company to run your medical services through in order to save a few bucks on taxes, figure out what the ramifications will be to your current work relationship. For example, will you lose your malpractice insurance umbrella? What benefits will be lost?
In addition to providing services to your patients, there are a number of reasons a doctor can form a company. A company could be created to purchase medical equipment and rent it to the clinic or your practice.
Your practice — your company — can do lots of things and play lots of “games” with the IRS that possible as an individual or a W2 employee. Before you dismiss me and bow off the thoughts of a company, you need to understand why it is so important. We’re not just talking about some extra deductions.
Adjusted gross income is a big deal
Adjusted gross income is the magic number in the IRS world. It determines your tax bracket, your alternative minimum tax exposure, your exemptions, how bad the government is going to penalize you for “being rich,” and how much of your wealth they are going to redistribute. Remember the Wall Street Occupiers are going to kill anyone who makes over $250,000. That number is adjusted gross income.
There is almost nothing you can do as an individual to affect your adjusted gross income. You can make a contribution to a standard IRA, and that’s about it. However, everything that your company does directly affects your adjusted gross income. Tax planning occurs in your company, not in your personal life.
That’s where doctors get in trouble. They try to invest their way into tax savings. You need to do the tax planning with your company.
Why is a practice a tax shelter?
The question everybody asked on the last article is “How does my practice serve as a tax shelter.” Let’s list some ways. Maybe the next article should expand on each one of these tax tips for a practice and list some more. Comment if that is important to you. Your comments drive what I write on, and they make PMD happy.
There are two types of qualified plans — retirement plans and benefit plans. Advisors basically only deal with retirement plans, not benefit plans. An individual can’t create the retirement and benefit plans. They have to be created by a company — your practice or possibly your “other company.”
Money that goes into these plans is deductable to the practice. That means that the money is diverted at the company level and doesn’t pass through to you and end up on your 1040. You can bury a lot of money in these plans.
But please beware. Doctors are being sold retirement plans and benefit plans and some of them are shams. The IRS will take the tax either on the front end or the back end, but they want a bite at the apple. So if the plan is structured so you can make money and in any way EVER (ever under any circumstance) spend it without paying a tax, you have a scam — a big scam, and you’ll lose.
You can “shift income” using your company. Under certain circumstances you can move money from the practice to the family and have the other tax payers (kids or parents), who are in a lower tax bracket, pay the tax. Thus, saving taxes and putting more money into the family’s coffers.
However, Obama has been hell bent on stopping this. This is something the rich do, so we have new regulations, but you can still do some things in this area.
Note that you can’t shift income, but your company can. It has to be done through the company.
You can hire your kids in the practice. Some four year olds are very good with a scalpel.
How do you hire a four year old? There are lots of ways. You can have your adorable four-year-old pose for photos that are used on advertising for the practice. Pay the child a modeling fee and royalty. Modeling fees are expensive and royalties are ongoing.
You can travel on the company dime and it’s all tax deductable. There are lots of reasons to travel that your company can justify as tax deductible that you couldn’t justify as a W2 doctor. If you use the government per diems, you may be able to put money in your pocket tax free in addition to getting your travel put on the company’s dime.
Rent your residence
Your company can rent your house under specific IRS rules, and the rental income is transferred from the company to you tax free. Of course, the company gets a tax deduction.
The company (practice) can provide computers and office equipment at your house so you can work at home and read the CT scans from the house and check the lab results. It can supply cars and cell phones, and other items to you and it’s tax deductible.
The bottom line is there are many things your company can do to “plan” your taxes that you can’t do as an individual. The great part is, whatever the company does affects adjusted gross income.
Tax planning has to be an every day “coordination” between you and your company, so you can create the numbers that lower your adjusted gross income.
Lee R. Phillips is a United States Supreme Court Counselor who for the past 30 years has helped high income individuals control their taxes and protect their assets. Call (800) 806-1998 or visit LegaLees.com. For a free copy of Lee’s set of practical tax ideas, go here.