Tax burden may be eased by recent changes in laws
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Several recent or potential tax law changes may help medical practices reduce the amount due to the federal government for 2010 and beyond.
Practices will need to analyze their financials and possibly consult a professional to determine what actions will benefit them. But experts say it is important to plan early.
Strategies fall into two categories -- shifting income from one year to another and increasing deductions -- but practices need to be aware of rules to ensure they do not run afoul of Internal Revenue Service regulations.
One change is a new hiring credit. The Hiring Incentives to Restore Employment Act means firms can apply for a 6.2% payroll tax credit for each position filled with a person who has been without a job for at least 60 days. This is equal to the employer portion of Social Security taxes. Employees must have been hired between Feb. 3 and Dec. 31, 2010. The credit applies to salaries paid after March 18. But does not apply to hiring relatives.
Practices may earn an additional $1,000 credit on 2011 returns if the worker stays on for at least a year.
"It provides limited relief for employers," said Rick Rubin, a certified public accountant who works with medical practices, and a partner with accounting firm Habif, Arogeti & Wynne in Atlanta.
The credit requires that the practice complete and keep on file form W-11, which states that the employee qualifies for the program.
Practices also may be able to claim tax credits for providing employee health insurance coverage. As part of the health reform law, companies with fewer than 25 full-time-equivalent employees who earn an average of less than $50,000 and pay a minimum of individual health insurance costs will be eligible for credits of up to 35% of their share of premiums. The credit applies to premiums paid since the beginning of the year. Physician-owner salaries are not counted when calculating the average, but salaries of employed physicians are.
Some practices might want to consider purchasing equipment before the end of the year to take advantage of a tax deduction that is due to expire, experts said. Up to $250,000 may be deducted for buying furniture, electronic medical records and medical equipment under Section 179. Some lease agreements also may be eligible for this deduction.
Some practices may do better by taking a depreciation deduction over several years, experts said. The cap on the Section 179 deduction will be reduced to $25,000 in 2011 without legislative action.
"If they need to buy any new furniture, computers or equipment for the practice, they should look at doing that now," Rubin said. "Equipment has to have been delivered and installed and be in use [before year-end] to be eligible." The deduction cannot be larger than the practice's income, and no more than $800,000 worth of equipment can be purchased.
Another tax-reduction strategy is to move income from one year to another. Money received on Dec. 31 may be taxed at a lower rate than that taken in on Jan. 1, 2011. Many expect tax cuts from the Bush administration to expire, and the tax rate on earnings over a certain level will go up.
"Practices should attempt to collect as much income this year [as possible] and report that income in 2010," said Ron Finkelstein, a certified public accountant and the partner who leads the health care accounting group at Morrison, Brown, Argiz & Farra in Miami.
But experts caution about skewing physician-owner compensation so that it relies too heavily on dividends and minimizes payroll taxes.
If a practice is an S corporation, the salary paid to a physician-owner is reported on a W-2 and is subject to withholding for Social Security and other government benefits. Dividends, which are on the K-1 schedule form to show income from ownership, are not subject to these payroll deductions, although they are still subject to income taxes on an individual's return. The IRS has ruled that salaries of S corporation shareholders must be set at a fair market value and cannot be set low to avoid payroll taxes.
"The physician is not paying high enough payroll taxes, and that can be challenged. You need to find the right balance. There's no finite answer, but it needs to be a reasonable salary," said Marc Lion, founder of the accounting and consulting firm Lion & Co. in Syosset, N.Y., and who works with many medical practices.