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Issue: 58 - Oct 15, 2013
Veterinary Practice Tax Planning: The Basics
By: Matt S. Nolan
Marsha L. Heinke, CPA, Inc

Tax planning is a lot like a summer road trip, both require that you plot a course and both have many stops along the way. For starters, map your course based on the practice’s tax reporting methodology: cash or accrual.

Next, when on vacation, pictures and video will document the adventure. Similarly, practices need to keep accurate records to document what happens in the course of the year.

Third, your vacation vehicle needs to be well tended. Similarly, practice equipment requires your attention to planning decisions that have many different tax implications.

Finally, a good vacation means everyone is healthy and onboard for the trip. Likewise, healthy practices monitor and manage important human resource issues through the course of the year to assist in tax planning strategy.

Road Map: Cash or Accrual?

Decision makers need to be aware of whether the practice is an accrual or cash based taxpayer. To summarize, cash based taxpayers record income when received and expenses when they are paid. Conversely, accrual based taxpayers record income when earned and expenses when incurred, regardless of when payments are made.

If your practice entity reports as a cash based taxpayer, deductions can be accelerated by paying certain bills with a credit card at year end. However, be aware that stocking up on inventory will not gain the practice an accelerated deduction, as those expenses aren’t deductible until they are used. Non-incidental supplies on hand should be counted and capitalized at the end of the year, regardless of reporting methodology.

For accrual based taxpayers, assure that proper bookkeeping is kept in regard to expenses such as utilities, laboratory, and crematory invoices. If accrual reporting is maintained, these expenses should be recorded in the year they are incurred. As an example, the phone bill the practice receives in January will likely be deductible in the previous year, as that is when the expense was incurred.

Contemporaneously Document Your Annual Journey

The importance of accurate recordkeeping cannot be overstressed. Accurate records will protect a practice in the event of an audit and can sustain deductions in the event that they are questioned. They provide proof of management policies and compliance with tax, benefit and labor laws.

Consistent bookkeeping methodologies and accurate records help in benchmarking and in establishing predictability of future results for strategic planning and budgeting. They allow you to work with your accounting professional to plan for capital conservation through maximizing legal tax positions for reduction of tax.

Good records are essential as they support practice value to third parties like banks, financing partners, and other stakeholders.

Pay Attention to Equipment Investment and Usage

How equipment purchases are viewed by the IRS has become a fluid process and laws may be changing again in 2014. Here is what you can rely on: for a practice to take depreciation for equipment in the year of purchase it must be placed in service by the practice’s tax year end (for most practices, December 31).

To accelerate deductions, practices can take advantage of Section 179 write-offs or bonus depreciation for qualified capital expenditures. In 2013, Section 179 allows for a write-off up to $500,000 of qualified capital expenditures, including acquisition of used equipment. Bonus depreciation allows for up to 50 percent of depreciation in the first year for qualifying new assets.

Also, periodically review property depreciation schedules to remove items that are taken out of service and disposed of. This is especially important in states with tangible personal property taxes as the practice could end up paying taxes on property that is no longer owned!

HR Related Issues in the Tax Journey

Worker issues are a major component of tax planning. One area that has drawn scrutiny from auditors in recent years is that of independent contractor use by businesses. Having written contracts in place detailing work to be performed by independent contractors is necessary to prove these relationships.

If an auditor reclassifies an independent contractor as an employee, the practice could face back taxes (FICA, FUTA and SUI) as well as penalties. Such reclassification can also impact qualified benefit plans such as retirement funding and health insurance.

Practice managers need to ensure Forms W-9 are up to date and on file with each independent contractor so Forms 1099 can be prepared and sent to independent contractors by the annual January 31st deadline. As a best practice, ensure Form W-9 is on file in advance of making any payment to a potential Form 1099 recipient.

In  regard  to  employees,  each  staff  member  should  review  all  of  his  personal information before year end to verify accuracy. This step will prevent the practice from correcting and resending Forms W-2, which can be a very expensive process.

For practices that operate as Subchapter S Corporations, special rules apply for health insurance  premiums  paid  by  the  practice  on  behalf  of  a  more than 2 percent shareholder. A “gross up” in wages is required to preserve 100% deductibility on the shareholder’s individual federal income tax return. Be sure to contact the practice’s accountant or payroll company so this “gross up” can be included on the last paycheck of the year.  Shareholder health insurance must be included on Form W-2 to claim the “above the line” deduction for self-employed health insurance premiums.

As you navigate your way through the yearly business journey, keep these basic tips in mind when making decisions. Be cognizant as to the practice’s tax reporting methodology, keep good records, monitor property schedules, and be aware of the many tax implications human resource decisions affect.

While tax deferral motivations should never override best management practices, you should work closely with the practice’s CPA throughout the year to maximize tax benefits in all aspects of practice operations and decision making.

Matt S. Nolan began working with the team at Marsha L. Heinke, CPA, Inc. in January 2012.  Having graduated with a Bachelors of Science in Accounting from University of Akron, he is currently working to meet all of the requirements necessary to qualify for the rigorous Certified Public Accountants examination.

 

Marsha L. Heinke, CPA, Inc.
934 Main Street
Grafton, Ohio  44044
Phone: (440) 926-3800
Fax: (440) 926-3801