The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants

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

Subscribe Now:Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest E-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos 

Filed under: Accounting, Taxation | Tagged: depreciating, expensing | 2 Comments »