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Some Tax Basics for Medical Professionals
By Edwin P. Morrow; III, JD, LLM
Astute financial advisors and healthcare focused accountants know that there are simple and overlooked strategies that can significantly add to the bottom line of any business or medical practice; as much as increasing practice revenues or reducing expenses. Physicians and medical professionals themselves should also understand some basic accounting and simple tax strategies that do not require five figure consulting fees or excessive risks of audit. Here are some basic concepts of financial accounting to know.
Tax Deductible Expenses
Medical professionals should understand the basic concept of a tax-deductible expense, which can be used to offset income in the year paid or accrued, and a capital expenditure.
Capital Expenditures
A capital expenditure must either be depreciated (similar terms are amortized or depleted), meaning that there is a deduction made over several years, or the expenditure may be required to be added to the tax basis of the property, meaning that there is only a tax benefit upon sale of the property.
An expense that adds to the value or useful life of medical office property is a capital expense. Capital expenses include expenditures for buildings, significant improvements or instrumentations and related medical machinery. For instance, a repair on an office roof may be a deductible expense, but a new roof will be a capital expenditure. Although both may be expensive, the repair reduces income dollar for dollar in year one, and the new roof reduces income only gradually over many years.
Understanding Accounting Concepts
This is a very important tax accounting concept. In essence, any significant asset purchased or expenditure that has a useful life of more than one year cannot be expensed, but may be eligible to be depreciated over the life of the asset. This means you have to wait many years to get the full tax benefit from the expenditure.
Depreciation Useful Life
Some common assets and their default useful life according to the IRS are:
- Computers and Peripherals – 5 years
- Office Machinery and Equipment – 5 years
- Transportation Equipment – 5 years
- Office Furniture and Fixtures – 7 years
- Certain Watercraft – 10 years
- Farm Buildings – 20 years
- Residential Rental Property – 27.5 years
- Leasehold Improvements – 39 years
- Non-residential Real Property – 39 years
- Land without improvements – cannot be depreciated
- Items held for inventory or ultimate sale – cannot be depreciated
Assessment
Note that even if your office computer hardware becomes obsolete in one or two years that the IRS may make you use the five-year depreciation schedule, but see the following section on Section 179 elections for exceptions. Computer software bundled and included with hardware must use the same rule. Software that has a useful life of less than a year, such as tax preparation software, may be a deductible expense, but other software costs may be amortized over 3 years. IRC § 167(f)(1). There may also be exceptions to the depreciation requirement for environmental cleanup costs, which may be eligible to be expensed as a deduction IRC § 198.
Conclusion
And so, your thoughts and comments on this Medical Executive-Post are appreciated. How have you used these strategies in the past?
Speaker:If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com or Bio: www.stpub.com/pubs/authors/MARCINKO.htm
Our Other Print Books and Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Physician Financial Planning: http://www.jbpub.com/catalog/0763745790
Medical Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Health Administration Terms: www.HealthDictionarySeries.com
Physician Advisors: www.CertifiedMedicalPlanner.com
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Filed under: Accounting, Taxation | Tagged: depreciating, expensing |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Depreciation Bonus and Section 179 Deductions Set to Expire 12/31/11
Recently, the U.S. Federal government made a change to the tax code which provides unprecedented incentives for investing in manufacturing technology. Specifically, the U.S. Federal government has increased “Bonus Depreciation” to 100% on qualified assets, which includes software. This level of “Bonus Depreciation” is up from 50% last year.
Simply put, this level of tax incentive to stimulate business investment is unprecedented. It is also very temporary as this provision is set to expire at the end of 2011.
Separate to this provision, the Section 179 deduction for capital equipment purchases, which includes software, has been increased from the previous limit of $250,000 to $500,000. This change will be in effect through the end of 2011.
Source: depreciationbonus.org
http://www.CertifiedMedicalPlanner.com
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Update on Expensing v. Deprecating
Changes made in 2010 allow as much as $500,000 to be written off in a single year, for 2010 and 2011, falling to $125,000 (indexed for inflation) in 2012.
The “election to expense” phases out based on a dollar amount of investment limitation ($2 million, dropping to $200,000 in 2012). Unfortunately, you can’t use it to create deductible losses. It’s limited to your net income before the deduction.
For qualified property that you depreciate rather than elect to expense, there’s a new additional 100% bonus depreciation deduction. Qualified property includes only new assets with useful lives of 20 years or less, including furniture, machinery and other equipment, land improvements and farm buildings, placed in service after Sept. 8, 2010, and before Jan. 1, 2012. Then the bonus depreciation drops to 50% through Dec. 31, 2012.
This deduction is not limited by any investment cap and, unlike the election to expense, can generate net operating losses. If you’re a self-employed doctor, own a consulting firm, financial advisory practice or business, this is a new opportunity to reduce your total tax liability.
CPA
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