Tax planning for physicians is a year round endeavor. Typically, it is not until they approach the year-end until they have a better understanding of their financial situation as it relates to profits, cash flow anticipation, expense allotments, and their tax consequences. Taking the opportunity to review the business’ books in order to assess possible year-end tax savings strategies is the biggest opportunity a practitioner has to save on taxes in the current year while looking a year ahead for more tax savings.
How to Achieve Year-End Tax Savings
For any of these year-end tax saving strategies, your business’s tax structure and accounting method should be considered. Also, before taking any tax-saving action this year, it is important to consider its impact on your tax situation in the coming year.
Defer year-end income: If you are a sole proprietor, S Corp or partnership using the cash method of accounting, any receivables you can defer into the next tax year will save taxes this year. This method may not make sense if you anticipate that your income tax rate will rise substantially in the coming year.
Accelerate expenses: Looking ahead, if you anticipate purchasing supplies, you can accelerate the deduction into the current year by making the purchases now. The same for any accounts payable such as utilities, rent or insurance for your business – make your January payments in December.
Maximize your Section 179 deduction: If you are planning any major equipment purchases, such as new computers, a company car, or machinery, accelerate the purchase into the current year to take full advantage of the Section 179 depreciation allowance that allows for accelerated depreciation and a deduction of the full purchase price in the current year.
Write-down your inventory: If you have inventory that is just sitting on the shelves, it is probably costing you more than if you just wrote it off. You have to offer the inventory for sale first, and if it doesn’t move, you can remove it from the shelves and write-off its fair market value.
Donate it to charity: A better option for your inventory may be to donate it to charity. A deduction for the fair market value can be taken which can result in more cash flow through tax savings than if the item were sold at a salvage price or simply junked.
Set up a retirement plan: If you haven’t done so, establish a qualified retirement plan. There are several options for sole practitioners to consider, such as a Simplified Employee Pension plan, SIMPLE 401k plans, and profit sharing plans. Each have distinct advantages and disadvantages depending on your business structure, the number of employees, and your cash flow situation. Be sure to review the contribution timing requirements as some plans require contributions to be made by October.
Review your business structure: Changing the structure of your business is a major decision that can have long term implications in the area of taxes, profits, your personal finances, and the growth potential of you business, so it should only be done with the guidance of a business planning expert. At some point, sole practitioners may be able to benefit by changing their structure from a sole proprietorship to an S Corp, or even a C Corp. This change should only be considered if you anticipate significant increases in profits and you plan to obtain public or private financing.
Of course, your best source for year-end tax planning is your tax advisor and any strategy mentioned here should be reviewed in the context of your specific tax situation. But, it’s never too early to begin preparing for potential tax savings.