Every year, you file your taxes. As a business owner and professional, you likely find your tax situation far from simple, requiring a team of accountants, attorneys, and financial and business advisers to ensure you’re not caught off guard when you file with the IRS.
Just like that energetic corgi nipping at your ankles who visits your office every spring, you can’t ignore the tax man. But strategy, coupled with expert advice, can lessen the headache of taxes for you and your business.
“The Tax Cuts and Jobs Act temporarily (through 2025) changes the federal tax landscape significantly and has added even more complexity, even as lawmakers crow about ‘simplification’,” says Marsha Heinke, DVM, EA, CPA, CVPM, who owns Veterinary Practice Made Perfect, a veterinary business advisory firm in Grafton, Ohio. “There is little that is simple and veterinarians as individuals and as business and commercial real estate owners need to plan even more carefully.”
With all of the changes in federal tax law, you’ll need to consider (and reconsider) a number of items as you file your taxes and contemplate business planning for coming years.
Here’s ten factors to weigh, before, during, and after, tax time.
1) Work with a CPA.
Heinke and her colleague, Jennifer Braid (CPA), emphasize the importance of working with a CPA who is up-to-date on rigorous continuing education and provides consultation based on your individual situation. A bonus, Heinke says, is a professional who understands the nuances of a professional service business like a veterinary practice.
“A good preparer will provide realistic advice for minimizing tax burden to the extent allowable by law and will clearly communicate the risks associated with more aggressive stances, which are offered up by the vagaries of the new law,” Braid says. “Just as for competent veterinary care, the consumer would expect to pay for the level of quality they receive. If a tax preparer primarily touts how much money he or she could save you, run.”
Keep in touch with your CPA and other advisors on a regular basis, recommends Heinke. Sit down and discuss tax burden and planning issues, well before tax time.
“It’s vital that whenever you have a life event, whether it’s a divorce, a death, funding a college education, that you talk to an expert,” Heinke says. “Get a little bit of a grip before you legally bind yourself to something. Any decision that’s transactional at all, call your CPA. Because once it’s already done, you’re stuck with it.”
2) Manage the day-to-day operations of your practice.
“Veterinarians generally have fairly complex tax lives,” Heinke explains. “Successful people stay on top of things.” Braid and Heinke recommend cloud-based bookkeeping solutions that allow bookkeepers, owners, and accountants to keep tabs on practice operations. Additionally, detailed, up-to-date, and reconciled bookkeeping records ensure an efficient and accurate business operation.
3) Check your withholding.
Heinke and Braid stress the importance of confirming your withholding status. Many Americans will take a hit on their 2018 taxes because the IRS adjusted the withholding tables with the new tax law. If your life situation changes, you need to adjust your withholding. Significant life events such as the purchase of a home, marriage, divorce, and birth of a child warrant a call to your CPA to discuss changes to your financial (and tax) picture.
4) Consider changes to exemptions and deductions.
In a blog post dated December 20, 2017, Chad Halstead and Alex Szarenski of Katz, Sapper & Miller CPAs in Indianapolis outline key provisions in the TCJA, including changes to individual tax brackets, exemptions, and deductions. Because personal exemptions no longer exist under the new law, individuals with higher incomes are hit with higher taxes, a reality pointed out by both Heinke and Megan Naasz, CPA and owner of Allay Accounting, PLLC, in Missoula, Montana.
“I’ve seen it [TCJA] affect those in high range incomes because they aren’t getting as many deductions,” Naasz says in regards to 2018 tax returns. She explains that veterinarians in higher tax brackets often pay more in state taxes and property taxes. With the itemized deduction for state and local taxes (SALT) limited to $10,000, many veterinarians will see a change to their taxes for 2018.
“There’s winners and losers in this deal,” says Heinke. “For small business owners, taxes are going to go up.”
5) Consider your business structure.
Most veterinary practices are structured as pass-through entities, meaning taxable profits from the business are passed through to the owners. Under the TCJA, veterinary practice owners can take a 20 percent deduction on pass-through income, as long as taxable income falls below $315,000 for married filers or $157,500 for single filers. Because veterinary practices are considered specialized service businesses, the income thresholds limit the pass-through income deduction.
Heinke and Braid suggest that practices could consider splitting business entities, but that hurdles exist in attempting to separate medical practice business from retail and pharmaceutical business lines. Because the tax law expires in 2025, they explain, the cost of segregating lines of business needs to be weighed against the potential cost savings.
6) Boost tax deferral.
“Take full advantage of the various benefit plans your employer offers,” says Heinke. “When possible, maximize your contributions to retirement plans, especially if your employer matches your plan contributions.” She adds that contributions to health savings accounts (HSAs) and health reimbursement arrangements (HRAs) provide tax savings on medical expenses that would otherwise be paid with after-tax dollars.
7) Evaluate fringe benefit options for employees.
As a practice owner, you must consider the longevity and “stickiness” of your employees, says Heinke. Employee benefit plans provide tax savings for your employees. Heinke says it is important to evaluate options — in doing so, you can both retain good employees and attract quality candidates to your practice. She identifies an additional benefit for employees: employer reimbursement of employees’ work-related expenses. Employers can take a deduction for those reimbursements, which is now unavailable to employees under TCJA.
8) Check your depreciation.
Under TCJA, business owners can take 100 percent immediate depreciation on equipment acquisitions, for both new and used (but new to you) equipment.
“It’s almost an immediate write-off,” says Naasz. Additionally, she explains, checking your depreciation method can save tax dollars with the new law changes. Accelerated depreciation via Section 179 allows for more control of how equipment expenditures are depreciated, giving business owners more flexibility.
9) Evaluate auto expense calculations.
For veterinarians who purchase a new vehicle for their practice, the actual cost deduction is also larger due to the new tax laws.
For example, if a veterinarian purchases a larger truck for their practice, the new law allows a 100 percent write-off for vehicle purchases over 6,000 gross vehicle weight. In a big tax year, Naasz explains, a veterinarian could choose to write off the full cost of a new truck purchase, if it falls above the 6,000 GVM threshold. This, of course, is limited to the actual business use of the vehicle. If the vehicle is used less than 100 percent for business purposes, then you would get the applicable percentage of business use as a deduction.
“Consider whether it’s beneficial to write off the actual cost of the new truck all in one year, or take the write-off over multiple years. You should also consider whether it is more beneficial to write off the actual costs of the vehicle or take a mileage deduction at a rate per mile usually adjusted by the IRS each year,” Naasz says. “Do you want something consistent year-to-year, or do you need a big write-off this year?” She cautions, though, that you can’t switch methods mid-stream: if you choose actual cost, you can’t switch to the mileage calculation in a different tax year.
10) Strategize charitable giving.
Bunching deductions is more important than ever to maximize tax savings,” says Heinke. She explains the use of donor-advised funds, where a donor can place a lump sum of money in an irrevocable account with a donor-advised fund. A deduction for the entire contribution can be taken in the year of donation, with donations to charities sprinkled out over the following years.
“You can mitigate some of the taxation,” says Heinke. “In a year of high taxable income, perhaps as a result of selling a practice, the provision gives you a lot of flexibility.”
File Your Taxes
You care about your patients and their human owners. You’re passionate about providing quality service and medical care. You know how to make quick decisions, but don’t let that front-line decisiveness derail the business of your practice. Take time to make thoughtful and educated choices about how you run your practice. Veterinary medicine may be what you do best, but don’t put business decisions on the back burner: retain quality help throughout the year to make tax time less of a pain.