Organize and Survive the Tax Planning Struggle

Physician's Money Digest, February15 2005, Volume 12, Issue 3

How to Pay Zero Taxes

In the preface to his book (McGraw-Hill; 2005 Ed), author Jeff Schnepperasks readers to figure out who made the followingstatement: "The hardest thing in the world tounderstand is the income tax."

The answer, surprisingly, is Albert Einstein, who's noslouch when it comes to numbers. Schnepper disputesthe claim that the only difference between death andtaxes is that death, on occasion, is allegedly painless.Death, he points out, doesn't become more complicatedevery time Congress meets.

Given the above admission by one of the smartestmen in history and the fact that 87 new tax laws havebeen enacted in the past 18 years, it makes sense toget organized and start early when it comes to incometax preparation.

Enacting Organization

For anybody who is either preparing to do their taxreturn or working with an accountant, first and foremostis to make sure you have all the information neededfor filing. This means being organized. Professionalswho make a living preparing other peoples' taxes—including many physicians'—say that being well organizedis critical to the process.

Wendy Barlin, CPA, with Brakensiek Leavitt Pleger,LLP (www.blp-cpas.com), says that being organized is themost important element when it comes to maximizingyour return and holding down the cost of having a taxprofessional handle the preparation. "If I have to scratchthrough a box of receipts, you can bet it's going to cost alot more than if I receive a Quicken or QuickBooks filewith all expenses categorized," Barlin explains.

The economic impact goes a lot further than simplyfooting the bill to your tax preparer. Barlin recalls onetaxpayer who used to provide her with all of his receiptsstuffed into a large box. Recently, she trained him onQuickBooks and he has saved $10,000 in taxes. "Heasked me why his taxes had gone down and I told himthat this year he's organized," Barlin says. "I could seewhere all his deductions were. Last year, I was fishing."

Barlin, who works with many physicians to preparetheir business and personal income tax returns, insiststhat it's important that taxpayers understand theprocess, and that they are better served when she teachesthem how to be organized. That way, if they decide tohire someone to handle their administrative work, they'llhave a better idea of what it takes to get the job done.

"There are a lot of Certified Public Accountants whotell clients not to worry; they'll take care of everything,"Barlin says. "If I did that, they'd be reliant on me for alltheir information, and they wouldn't understand howthe process works. I'm willing to train them and I'll holdtheir hand through the process, but I'm not going to sitand write their checks for them."

Alan Rich, Jr, CPA, a tax manager at Mengel,Metzger, Barr & Co, LLP (www.mengelmetzgerbarr.com), adds that being organized helps your preparernot only with this year's taxes, but also with future years'taxes. "If I'm trying to figure out the accounting mess,that takes away from my time to do tax planning," Richexplains. "I'm not only thinking about today, but also 5years from now. What can we do to really limit the exposureon taxes? How can we give the physician more dollarsin their pocket than Uncle Sam? That's hard to do ifI don't know where to begin. Being organized saves us alot of time and the physician a lot of money."

Finding a Tax Preparer

If you've been preparing your own income taxreturns or employing a tax preparer and are dissatisfiedwith your results, it might be time to find a new tax preparer.Professional tax preparers suggest that you startby looking for an accountant who has a CPA designationas well as familiarity with physician practices.

Bruce Levine, a principal of Levine Katz Nannis +Solomon (www.lknscpa.com), which specializes inaccounting for physicians, says that physician-specificfirms have a better understanding of what doctors doand how the IRS will interpret certain filings.

"Physicians are not your average businesspeople,"Levine points out. "They have a different perspectiveon the world. Someone who has worked with the medicalprofession and understands the terminology as wellas how a medical practice runs is more capable of diggingin and finding things that are related to anddeductible for business."

Your physician-colleagues are an excellent sourcefor finding a reliable tax preparer. Levine points outthat almost all of the doctors he works with come fromother doctors' recommendations. Your attorney, whoknows and works with CPAs frequently, is anotherexcellent source.

Barlin says that when considering a tax professional,the most important criterion is that the preparer listenswhile you do most of the talking. "If someone is interviewingme to be their tax preparer and I'm doing all thetalking, telling them how wonderful I am, there's intrinsicallya problem," Barlin explains. "This isn't about me;it's about the taxpayer." Barlin says the prospective taxpreparer should ask questions about the physician, suchas, what is it you're looking for in a tax preparer andwhat are your long- and short-term financial goals?

Rich agrees. He points out that as a tax preparer andplanner, he has to understand physicians' goals, what theywant out of both the practice and themselves personally.Do they want to retire in 5 years or 10? How do theywant to transition their medical practice? Are there anylong-term plans, such as college funding for the children?

"I need to understand what the physician is lookingfor, not only from a tax preparation standpoint, butalso from a financial standpoint," Rich explains. "AndI need to understand why the physician is coming tome. What are they not getting in service from the person who was preparing their taxesbefore? Maybe I don't have the expertisethey seek and I'm not the person forthem. If I'm not the person for them, Ican refer the physician to somebody elsewho does have that expertise."

Barlin also suggests that a physicianshould trust their gut instincts. If you'resitting across a table from someone andthey just don't feel right, don't go withthem. "This is one of the most intimaterelationships you're ever going to have,"she emphasizes. "There's nothing that Idon't see. So if you don't feel comfortablewith the person, no matter how goodthey are, they're probably not the rightperson for you."

Gaining a Head Start

As the popular expression notes, theearly bird catches the worm. Tax professionalsagree that it's never too early tobegin putting tax planning strategies inplace for the 2005 tax year. For physiciansbased in California, Barlin suggests thatone of the most important things they cando if they're going to incorporate is to doso early in the year. In California, entitiesare required to pay an $800 minimum taxevery year they are incorporated exceptthe first year, when they are exempt.

"I suggest that people earning morethan $150,000 of gross income incorporatebecause that's the point where thesavings outweigh the costs of incorporating,"Barlin explains. "There's more flexibilityin what you can deduct when you'reincorporated. And it doesn't make senseto incorporate in November, because thenyou're only getting 2 months free.Physicians should check the rules in theirstate before they incorporate."

Rich explains that one of the taxplanning strategies he has employedwith physicians is to add family membersto the practice's payroll. Of course,the family member has to render somesort of service; they can't simply be paidfor doing nothing. But Rich has foundsome unique ways for physicians to addtheir children to the business payroll.

Rich recalls working with one obstetrician."We had his young children professionallyphotographed for the pamphletthat goes along with the practice,"she explains. "Frankly, somebody wouldhave had to be paid to be baby models.He had three children, whom he paid$2000 each. On his tax return, ouraccountants could establish either aRoth or a deductible IRA for the children.And none of that income is goingto be taxed. So you take the money outof the practice that's going to be taxed ata higher rate, give it to the children, andprovide them with a great start for theirretirement or college funding."

In addition, tax professionals stress theimportance of keeping business and personalexpenses separate. Medical billingsoftware should not be used as accountingsoftware. "I encounter that mistake a lot,"Barlin says. "It's very important not tomingle money."