The quickest way to put more money in your pocket is to reduce taxes.
But if you’re a savvy taxpayer – or you have an experienced tax preparer on your side – there are a myriad of possible deductions that you can take advantage of that will keep more of your own money with you, versus handing it over to Uncle Sam.
How you can put money back in your pocket right now
The “average” taxpayer (i.e., someone who works as an employee, earns only W-2 wages, and who has no deductible expenses like investment real estate) will typically only have the standard deduction or a few small itemized deductions available to them. This is especially true with recent tax reform because you are no longer able to deduct unreimbursed employee business expenses.
But, as a self-employed physician or a medical practice (i.e., business) owner, the tax-deductible door swings wide open for deduction opportunities. In this case, deductions will typically come via expenses – and quite frankly, business expenses are one of the best kinds of tax deductions.
Some of the most common tax-deductible business expenses can include:
- Health insurance coverage
- Office overhead (including working from a home-based office)
- Wages that are paid to your employees
- Business (and/or investment) related travel
- Contributions to various health and retirement plans
We’re going to look at some of these in more detail.
It pays to insure your health
Let’s start with the tax advantages you can get by simply insuring your health.
In some cases, health insurance premiums may be tax deductible as a part of your overall medical expenses on Schedule A as an itemized deduction. But if your total medical expenses are not over 10% of your Adjusted Gross Income (AGI), you won’t be able to take your medical expenses as a deduction.
This is the case for most healthcare professionals. In fact, if you qualify for the Self-Employed Health Insurance deduction, you may even be allowed to deduct 100% of the health insurance premiums that you pay for yourself, as well as for your spouse and your dependents.
This not only includes the premium for your health insurance coverage, but also the premium(s) that you pay for dental and long-term care insurance coverage.
To qualify for this deduction, you need to meet two criteria:
- First, you must have no other health insurance coverage. Here, for instance, you may not take the deduction if you are eligible to participate in a health insurance plan that is maintained by your employer (if you are working as an employee, as opposed to a self-employed individual), or by your spouse’s employer.
- You must have at least some amount of business income. In this case, you are only allowed to deduct as much as you earn from your business. So, if your practice does not earn any income – or even if it makes money but incurs a loss for the year – you will not be allowed to take this deduction.
It is important to note that your health insurance premiums are not considered a business deduction. Rather, the Self-Employed Health Insurance Deduction is a personal deduction that may be used by those who are self-employed.
It is reported on your IRS tax Form 1040 (and possibly also on your Schedule C, if you are a sole proprietor). In addition, the deduction only applies to your federal, state, and local income taxes, and not to your self-employment taxes.
If your practice has employees, then generally speaking, any of the expenses that an employer incurs that are related to health insurance for employees or for dependents are 100% tax deductible as an ordinary business expense on both state and federal income taxes. This rule applies regardless of whether your practice is set up as a corporation, a partnership, or an LLC (Limited Liability Company).
Likewise, reimbursements that are provided by an employer for healthcare coverage and the medical expenses of employees are treated in a similar manner to employer-provided premium contributions – as long as some rules are followed.
Doing business at home can add to your deductions
In order to qualify for the home office tax deduction, the part of your home that is attributable to business must, according to the IRS, be “exclusively and regularly for your trade or business”. This means that in order to be deductible, your home office must be your “actual” office, and not just at your home for convenience.
While you may not treat patients at your home, there is a chance that you still have a home office where you review paperwork, conduct research, prepare reports, read images, and/or consult with colleagues. In fact, depending on what you specialize in, this could very well be your primary place of business. If this is the case, there is actually a lengthy list of things that could be tax deductible for you, even after the Tax Cuts and Jobs Act of 2017.
One of the easiest and most common methods to calculate your home office expenses is to simply figure out the amount of space in your home that is allocated to your business. For instance, if your home has a total of 3,000 square feet, and the office space you use is 300 square feet, then you would be able to claim 10% of your home-related costs as a business expense. These expenses may include your:
- Mortgage interest or rent
- HOA Fees
- Depreciation on your home
Over the past several years, qualified business owners/taxpayers have been able to opt for the “simplified option” for the home office deduction. With this method, you can claim a standard deduction of $5 per square foot of your home that is used for business purposes. The simplified method does max out at 300 square feet of office space. So, going this route, your 300 square foot business area could get you a maximum tax deduction of $1,500.
There are other potential deductions, too, if you use a part of your home to run your business. For instance, you may be able to deduct the cost of equipment – such as computers and printers.
Likewise, if using the Internet and your phone are necessary for your business – which they most likely are – they too may be deductible. In this instance, you can only deduct the percentage of these costs that are business-related.
Traveling near and far can pay off at tax time
Provided that your travel is for the purpose of doing business, then all of the related expenses, such as hotel, airfare, gas, and meals, can be tax deductible.
In fact, just about any travel can be deductible if you make it a business or an investment-related expense, provided that you follow the IRS guidelines that require you to spend more time doing business than you do vacationing.
So, for instance, if you spend four hours of a “regular” eight-hour workday tending to business or investment needs – such as looking at real estate, touring a practice that you’re interested in purchasing, and/or meeting with patients who reside outside of your “tax home” – you will have tax deductible expenses.
Just some of the travel-related tax deductions you can take include:
- Cost of travel by airplane, train, bus, or car between your home and your business destination.
- Fares for taxis or other types of transportation between the airport or train station and your hotel, as well as between the hotel and the work-related location.
- Shipping of baggage, as well as sample or display material between your regular and your “temporary” work location(s).
- Use of your vehicle while you are at your business destination.
- Meals and lodging.
- Dry cleaning and laundry.
- Business calls while you are on a trip.
- Tips that you pay for services related to any of the above expenses.
- Other similar “ordinary and necessary” expenses that are related to your business travel.
In order to ensure that you’ve got all your deductible ducks in a row, it is recommended that you keep great records of your expenses. When it comes to the IRS, documentation is usually the name of the game. So, in order to ensure that you’ve got all your deductible ducks in a row, it is recommended that you keep great records of your expenses.
Keep more by deducting employee expense reimbursements
Regardless of whether your practice is large or small, it is highly probable that it incurs some expenses – and sometimes it is the employees who pay these out of their own pockets. That is where expense reimbursement comes in.
The expense reimbursement process allows employers to “repay” employees who have spent their own money for business-related expenses, as well as some other qualified costs (such as medical care). When these expenses are repaid by the employer, the employee is not required to report the payment(s) as income on their tax return. That is, along as certain IRS rules are followed.
Business-related expenses that are incurred by employees may include such things as:
In some cases, an employer will provide a per diem (i.e., per day) allowance to employees in order to cover expenses that are incurred while they are on a business trip or other company-related event.
In other instances, employees may be provided with a company credit card that they can use while they are conducting business. (As a side note, business credit cards can help your practice or business to build a credit profile which can allow for more favorable terms if you need to take out a business loan – provided that some - or better yet, all - of the card’s balance is paid to the credit card issuer on time).
In some cases, more advanced deductions or strategies may be used.
In my book, I go into detail on some more advance deduction strategies, including:
-Collecting Rent without Claiming the Income
- Taking a Section 179 deduction
- Exploring Medical Expense Reimbursement Plans (MERPs)
To get a comprehensive overview of everything we’ve talked about here today, and go deeper into the more advanced options, pick up your copy of Advanced Tax Planning for Medical Professionals. This book provides a foundation for basic and advanced tax planning. You’ll read real-life examples of medical professionals who saved big just by using these strategies. You’ll also receive exclusive tax strategy resources to help you get started right away.
Always remember, the information here will give you a 30,000 foot overview of various tax-reduction methods. But don’t dip your toe in these waters alone, because leaving out certain stems (regardless of whether it's intentional or unintentional) could end up leading to IRS penalties.
We’re here to help!