Tax Tips for Your Practice

How to Reduce Your Tax Burden & Boost Your Productivity

As a Financial Advocate to chiropractors, I performed a survey of 117 doctors my firm works. 107 of them were overpaying on their taxes, many of them by tens of thousands per year. That didn't surprise me. But what did is that an astounding three-fourths of them were happy with their CPAs.

They're happy with their CPAs for the same reason they overpay on taxes: They simply don't know of anything better. When you're done reading this article, you may want to fire your CPA. But you'll know about safe and legal strategies for drastically reducing your taxes.

Here are the most important things every chiropractor should know about taxes:

Don't Let the Tax Tail Wag the Dog of Productivity

Would you rather pay $1 million or $10 million in estate tax? Most people say $1 million. My answer is always $10 million, because it would mean I made much more money than if I owed $1 million.

Taxes should definitely be taken into consideration with any financial plan, but some chiropractors actually don't want to produce more because they're afraid of paying too much in taxes. They base financial decisions primarily on tax ramifications. In other words, they let the tax tail wag the dog of productivity.

It helps to understand the difference between average and marginal tax rates.

The marginal tax rate is the rate of tax applied to the last dollar added to your taxable income. For example, the current 25 percent federal income tax bracket for a single taxpayer applies to incomes between $34,500 and $83,600. But if your taxable income comes to $83,601, that doesn't bump your entire income to the 28 percent bracket. Only the dollars earned above the bracket are taxed at the higher rate. So even though you may be in the 28 percent bracket, your effective/average tax rate will be much less.

Your first and best defense against taxes is always to earn another dollar, rather than limiting productivity or settling for a lower income in the name of saving on taxes.

Be Proactive with a Tax Strategist, Not Reactive By Using a Tax Preparer

Most chiropractors have a CPA that simply prepares their taxes at the end of each year. This makes them reactive rather than proactive.

Instead of anticipating and strategically solving potential tax problems, such tax preparers scramble to limit your tax liability just once throughout the year. And to accomplish this, they usually tell you to dump as much money as possible into a qualified plan, or recommend other things that you otherwise wouldn't do except to save on taxes, which creates even more problems down the road.

In contrast, a tax strategist makes tax season a non-issue by keeping you organized, creating and tracking financial benchmarks throughout the year, and limiting your tax burden.

It's the difference between traditional doctors and chiropractors. As you know well, traditional doctors play defense with symptoms and rarely address the root causes of health issues. In contrast, chiropractors take a holistic, offensive approach to health and wellness and focus on the cure, rather than alleviating symptoms.

Your tax strategy should be like a wellness program—not a one-time, reactive event, but an ongoing, proactive strategy. It starts with the right accountant "practitioner." An excellent CPA won't simply prepare your taxes. He'll help you take advantage of available tax breaks and new laws, such as the fairly recent Economic Recovery Act. He'll dig deep and amend previous years' tax returns as needed.

The worst mistake you can make is to try to do your taxes yourself. Would you recommend that your patients take a do-it-yourself approach to health and wellness? Sure, they need to be personally responsible, but you have much more specialized knowledge. Your taxes are no different.

It's also ill-advised to use the cheapest tax preparer. This may save you a few hundred dollars in fees per year—while costing you thousands in avoidable taxes.

And how can you tell if your CPA is a preparer or a strategist? Big hint: If you're just starting to think about last year's taxes as you read this article, you have a preparer. A strategist would have worked with you throughout the year to strategize and address potential issues.

Plan for the Future, Don't Defer to the Future

Here's another way you can tell if you have the wrong CPA: You bring her your taxes at year's end, and one of her primary and automatic recommendations to reduce your taxes is to put money in a qualified retirement plan.

This is lazy accounting at best. Are taxes going up or down in the future? Do you plan on being more or less successful in the future? So why would it be a good strategy to save on taxes today in a way that creates a bigger tax burden tomorrow?

Of course, traditional retirement planners will tell you that during retirement you can live on 70 percent or less of your pre-retirement income, and that this will lower your tax bracket.

First of all, no one knows exactly what future tax brackets will be. Second, is this really how you want to spend retirement: living cheaply, afraid to spend the money you've earned for fear of triggering tax consequences? Do you really want to have a lower standard of living when you retire?

In contrast to qualified plans, there are other products and strategies that provide much better exit strategies upon retirement while still offering tax benefits during the growth phase.

This doesn't necessarily mean you shouldn't ever contribute to a qualified retirement plan. But such a decision needs to be part of a holistic, long-term financial plan, not a reactive and misguided accounting strategy based solely on numbers today.

[pb]Increase Your Deductions With Confidence

Chiropractors frequently ask CPAs for a bullet-point list that spells out legitimate deductions explicitly.

But Section 162 of the IRS tax code simply states that you can deduct all "ordinary and necessary" business expenses. For most Chiropractors, this means they should be deducting far more expenses than they currently are. Deduct anything and everything connected with your business, while making sure you can build the case to support the connection.

Many chiropractors are wary of aggressive approaches to tax strategizing because they fear the IRS. But the right strategist can steer you clear of red flags while also helping you capitalize on legal, safe, and legitimate tax breaks.

It's also critical that your accounting books are done to effectively facilitate such a proactive approach. It's impossible to do effective tax planning when your accounting is sloppy or delayed. The IRS has recently started asking audited taxpayers to provide a detailed listing of their annual accounting transactions. They're looking for misclassified transactions and year-end adjustments inconsistent with prior transaction classifications.

Accounting records should also include legal documents, corporate minutes, and agreements that support your tax strategies.

Incorporate to Reduce Your Rate

I'm shocked by how many Chiropractors operate as sole proprietors, which is the worst arrangement possible for taxes and liability exposure.

Incorporating provides the following critical benefits, among others:

• Protect your personal assets. Both corporations and LLCs allow you to separate and protect your personal assets and limit your liability for debts and legal obligations.
• Deductible expenses. Both corporations and LLCs may deduct normal business expenses, like salaries, before allocating income to owners.
• Tax flexibility. Structuring your entity correctly can help you avoid double taxation of corporate profits and dividends.
• Build a sellable business. Corporations and LLCs continue to exist, even if ownership or management changes. Sole proprietorships and partnerships end if an owner dies or leaves the business. This means incorporating allows you to sell your business for additional retirement income, rather than just closing your doors and walking away.

A competent attorney, in coordination with your CPA, can help you choose and properly structure the right entity.

Withdraw Business Income Strategically

How you withdraw business income can have a significant impact on your taxes. Withdrawals can come in the form of salary or dividends, and which one you choose depends on your legal entity.

Salary is your total pay package, and includes such things as bonuses, deferred payments, and fringe benefits. S corporation owners may reduce their tax burden by keeping their salary compensation as low as possible and withdrawing cash via dividends instead. Salary is taxed at a higher rate than dividend income because it's subject to employment taxes.

Dividends are distributions of company profits only available to corporate shareholders. How these payouts are treated depends on the type of corporation. S corporation owners have to pay the same tax on profits whether or not they withdraw the money for income, so it may be advantageous for them to maximize dividends.

Again, consult with a competent and strategic CPA to get further details for your unique situation.

Use Cost Segregation to Benefit from Depreciation

If, like many Chiropractors, you own your building, "cost segregation" can make a drastic difference in deductions due to depreciation.

This effective but under-utilized accounting technique shortens the depreciation period of your assets for taxation purposes, which reduces your current income tax burden. A cost segregation study, performed by an engineering firm, identifies all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property). This results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow.

If your accountant is unfamiliar with cost segregation, you should find one who is.

Get Deductions by Investing in Your Business

Have you purchased any new equipment for your business in the past year? Or perhaps you haven't because you couldn't quite justify the expense?

Section 179 of the IRS tax code offers benefits for both scenarios. It allows you to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. The full purchase (or lease) price of qualifying equipment can be deducted from your gross income. It's the government's way of incentivizing businesses to invest in themselves.

Conclusion

You work hard for your money, and you deserve to keep as much of it as possible. Yes, you want to pay your fair share. But paying more than that is just bad accounting.

Put your taxes in their proper context and never let the tax tail wag the dog of productivity. And make sure you have the right tax strategist to safely and legally reduce your tax burden to bare minimum.