Printer-friendly format

Mark Puckett, BDO Seidman LLP Regional Tax Partners

Most physicians make a reasonable amount of money, and when it comes to tax time, here's the rub: "It's very difficult not to be taxed on that, because you've got the money," said Mark Puckett, CPA, regional tax partner for BDO Seidman LLP.

Puckett represents numerous high-income professionals, including physicians in Tennessee, and he said some share a common malady — letting their desire to decrease their tax burden fog their financial decision-making.

"Their main focus shouldn't be, 'Well, I'm paying too much tax.' No, their main focus should be, 'Do I have the right plan?' It's the psychology of where they are," he said. "I've defended physicians in very contentious IRS exams back in the 1980s and '90s when they invested in a lot of these tax shelters. Ask Willie Nelson or Wesley Snipes about tax planning that's too good to be true. Physicians are just notorious for investing in things they don't understand. There are some things that are just too good to be true."

While Puckett said there aren't as many get-rich-quick schemes and tax-shelter scams targeting physicians as there were in the 1980s and 90s, he still occasionally sees physicians fall prey. "Anybody who even promises you 10 percent return, you ought to head for the hills," he said.

Rhonda Sides, CPA, principal of healthcare services for Crosslin & Associates in Nashville, agreed that physicians must be wary. She said doctors are "a natural target for high-wealth management vehicles and tools for their money," and physicians may develop a herd mentality should a colleague appear to be successfully pursuing a tax-advantage strategy. "Those are always lunchroom conversations," Sides said. Simply put, don't assume a colleague has done his or her due diligence.

Sides and Puckett had similar words of advice for physicians:

Hire a trusted financial planner, accountant and lawyer.

Listen to and consider their recommendations. "That's the disconnect," Puckett said.

"Keep us informed. There's no such thing as a dumb question," Sides said.

Added Puckett, "The overarching lesson to be learned here is that most people, and especially professionals who don't have a financial and economic acumen, don't understand risk."

The Right Way

A financial plan should "fund your dreams," Puckett said. And if one of your dreams is to pay fewer taxes, a competent financial planner will help in that regard, too. "It's all about growing the individual's net worth in a tax-efficient way," he said, noting that a physician's plan should also be "heavily focused on asset protection."

As physicians choose more complex corporate structures for their practices, a tax professional is more important than ever to ensure that doctors receive the best tax advantages both for the practice and personally. Sides said one of the most widespread complications is the mingling of personal and practice finances. Problems are common, she said, when physicians and/or practice managers don't understand the nuances of depreciation, life and disability insurance, health benefits, retirement funds such as 401(k)s, car leases and expenditure reimbursements.

"Those things can muddy up the accounting, and we know to look for those things that may not be deductible for tax purposes or that may be personal expenses that need to be reclassed because they're not bonafide operating expenses of the business," Sides said.

Just because the practice writes the check doesn't make the expense a business expense. "The practice uses its cash to potentially pay your personal car lease, but if the car lease isn't in the company's name, we need to be looking at who should be paying for that and who's benefiting from it and determine whose expense it really is," she said.

Credit cards are yet another potential bugaboo, especially when physicians use one card for both professional and personal travel in order to rack up the most frequent-flyer points. "There's nothing wrong with that, but it creates an accounting nightmare because someone has to look at every credit-card bill to determine if this was a business expense," Sides said.

Puckett recommended that physicians have the practice pay all business expenses such as professional travel and medical publications. He called this simple tax tip "low-hanging fruit," yet he said he frequently sees practices set this up improperly. In short, individuals have a limit on miscellaneous itemized deductions and an income threshold, whereas the business doesn't.

Another mistake — and one that can be very costly — is when the practice doesn't pay physicians based on services actually rendered, Puckett said. A landmark IRS decision in 2001 resulted in a huge tax liability for a pediatric group practice because senior physicians, who weren't providing as many medical services as the practice's young associates, were reaping too many of the profits. The IRS looked at the compensation as a dividend – and dividends aren't deductible. Puckett called compensation structures "probably one of the most hotly debated items within the medical practice community."

Planning, he said, is "the whole shootin' match."

What to Do Right Now

If you haven't started considering your 2008 tax liability, you're late. "Don't wait until the last minute to find out what your projected net income looks like before you start figuring out how you're going to whittle it down," Sides said.

The big news for 2008 is the equipment depreciation deduction allowed for this year only. At $250,000, it's double the typical deduction rate and is the result of the federal Economic Stimulus Act. Thus, if a practice has the funds and really needs new ultrasound equipment, for example, this is the year to expense that capital equipment as long as it doesn't cost more than $800,000.

Paying expenses early is another option to whittle away net income. "Now remember, you're borrowing from next year's deductions, but it goes in a circle," Sides said. The practice just needs to make sure it reserves enough to pay January and February bills – two months that are the slowest in terms of healthcare services because patient deductibles start from scratch.

In closing, Sides cautioned that each practice has its unique financial character. "What's good for one practice, may not be good for another," she said.

Tags:

None

Login and voice your opinion!