Time for a Tax Check-Up?

#1 Tax Check-up Item for 2008:

If you’re like most physicians, you barely have time for your personal and family life after spending long hours with your practice. The last thing on your mind right now might very well be your 2008 tax return. Deciding to put off thinking about your taxes, however, could end up being one of the most expensive decisions you make this year.

The problem is that the longer you wait to put a new tax strategy in place, the more taxes you’ll pay this year. At the very least, make sure you look at one part of your overall tax plan before year end.

Look at Your Business Structure

Generally speaking the best business structure for a sole practitioner is an LLC (or PLC or PLLC, depending on your state) that elects to be treated as an S Corporation for tax purposes.

Above all, avoid operating as a Sole Proprietorship, or Schedule C. You will:

• Risk everything you own if you get a lawsuit through the practice,

• Pay an additional 15.3% in self-employment tax, and

• Face a 1 in 7 chance of an IRS audit.

I’m also not a fan of an LLC that doesn’t elect a tax treatment. In that case, you get the default tax treatment that the IRS chooses. As a general rule, if the IRS chooses, it’s probably not going to be a choice you want. In this case, they’ll select to have your single member (one owner) LLC taxed as a Sole Proprietorship. That means you:

• Pay an additional 15.3% in self-employment tax, and

• Face a 1 in 7 chance of an IRS audit.

A corporation, on the other hand, has no self-employment tax and has a 1 in 100 chance of IRS audit.

For everyone who is not a professional, we think about forming a C corporation instead of an S Corporation if taxable income is over $150,000. In the case of professionals like doctors, dentists, architects, lawyers and accountants (yes, I’m in the same boat), we get stuck being called PSC or personal service corporations if we are operating as C Corporations. That means any taxable income is taxed at a flat 35% tax.

Additionally, if income is retained in the corporation it’s subject to an additional tax called an accumulated earnings tax. So, generally, if a doctor has a C Corporation that is a PSC, he/she will pull all of the income out in the form of salary. That means payroll tax and ends up not providing any other benefits that a C corporation could have.

So, that leaves the S Corporation tax structure as the best for the practice. Add in the LLC additional asset protection and you have what is often the best choice for doctors.

If your taxable income is over $350,000, you might consider forming a C Corporation for some part of your practice that would not be considered PSC. For example, we set up a C Corporation to handle education materials for one client’s medical practice. Using the right type of documentation and clear proof of legitimate deductions, we were able to save the doctor $20,000 per year in taxes on just this one strategy alone.

The best benefit comes when you set up the right structure as early in the year as possible. You can make 2008 your best tax year yet, but only if you act fast!