Tax Planning/Strategies for Medical Practices

If you are a doctor, you probably make a good income.  And because that is the case, you might assume you will owe more taxes to the government. Although your tax obligations are typically quite high, medical practices like yours have many legal tax strategies available to them.

You might be surprised how much potential for tax deductions the federal tax code affords. It is a matter of learning the tax strategies and knowing how to implement them that could end up saving your medical practice money. There are some well defined tax strategies you can implement right away.

Here are several methods for positioning your practice more favorably when it comes to how much taxes you will owe the government.

Proper Entity Selection

 A fundamental choice that you make for your medical practice that has a bearing on your taxes is choosing the appropriate entity.  Your entity selection is determined by who the owners of the business will be and how the profit will be taxed for your medical practice.

Here are some considerations when it comes to choosing your entity: 

• Do you have employees?
• What state is your practice located in?
• How much revenue does your practice generate?
• Do you have to protect any assets or yourself?
• Are you seeking more permanence or transferability?
• What are your costs and managerial responsibilities?
• What are the tax benefits and liabilities associated?

There are various options medical practices can choose, and they each include benefits and disadvantages. Based on the state you work in, some of these options might not be available to your practice.

Partnership

Partnerships are known as pass-through entities. The partnership’s tax return serves as an information return and the income and losses both pass through the entity and into the owner’s personal tax returns.

It is the case that 100 percent of partnership profits will be passed to the owner and taxed at your ordinary rate and subject to self-employment. Also, you do not take a W-2 salary. You are mandated to select the partnership option if you have more than one owner, which could include your spouse in some states.

Keep in mind that you could still experience liability issues with a partnership unless you opt for a limited liability company (LLC).  However, the LLC protections do not apply to physicians. 

Sole Proprietorship

A sole proprietorship is simple and relatively inexpensive to establish and maintain. That simplicity is why it is one of the most common entity types selected by medical professionals.

When you operate as a sole proprietor, you pay income tax at your ordinary rate and self-employment tax on all of the profit from your medical business. Self-employment tax means you are completely responsible for all 15.3 percent of your Social Security and Medicare taxes with an additional 0.9 percent Medicare Tax if your income exceeds $200,000 filing as a single or $250,000 if filing jointly. You don’t take a W-2 salary. 

Although sole proprietorships are easy to administer, they do produce significant individual risk for you, the owner, and they can be audited by the IRS more often than Partnerships,

S-corps, or C-corps. Despite creating a single member limited liability company (SMLLC), as a physician, you still cannot avoid personal liability. 

S-Corporations 

Similar to partnerships, S-Corporations are pass-through entities. Any income or losses are usually taxed at the entity level.It is worth noting that certain states will impose an entity-level tax.

S-corporations are distinct from partnerships and sole proprietorships in how they are taxed.  You are mandated to take a reasonable salary in your S-corp, which will be subject to Social Security and Medicare taxes. But any profit exceeding your salary is considered a distribution and is not subject to Social Security and Medicare taxes. This strategy has the potential to be a substantial tax savings, depending on your particular circumstances. 

Even though there are tax saving qualities to the S-corporation, they are more expensive and time intensive to administer. What’s more, they mandate you be on the payroll and limit the types of ownership. 

C-Corporations 

This is a stand-alone entity that protects against most business risks, except for malpractice, which still requires insurance. . Nonetheless, a C-corp will protect you from general business liabilities. C-corps are easy to transfer through corporate stock and well understood governance laws. If you intend to have external investors in your medical practice, this form of entity would suit you perfectly. 

C-corporation profits are taxed at the entity level. You receive a W-2 salary from the business and if you take any profits from the business they are considered dividends and taxed at dividend rates. This structure leads to the same profit being taxed twice. 

C-corporations are also more expensive and time-intensive to administer. However, for some companies, typically larger organizations, it may end up being a better option. 

Retirement Plan 

You will find contributing to a retirement plan is the easiest and most straightforward way to reduce your taxes for your medical practice. When you contribute to a pre-tax retirement plan, you will receive a deduction for that contribution. That investment means you pay less on taxes because the retirement contribution decreases your taxable income. 

It is worth noting that there are restrictions in how much you can contribute to your retirement depending on the type of retirement plan and whether you are a team member or employer. 

Another benefit of contributing to a retirement plan is potentially paying a lower rate at retirement than when you put the money into the retirement account. Keep in mind that your retirement savings are tax-deferred. This deferment means you don’t have to pay tax when you contribute to your retirement.  It will grow tax free. When you do withdraw these retirement funds, you will pay a tax on them at that time. 

For a lot of doctors who typically retire before they have to take required distributions from their retirement account at age 72, they could take advantage of lower tax rates and begin taking retirement contributions earlier so their distributions are dispersed over more years. After age 59 ½, there is no penalty for taking your retirement out prior to age 72. 

You also have the option of converting your pre-tax retirement into a post-tax retirement account, known as a Roth account.  You do this option by paying tax at lower rates between retirement and age 72.  This alternative could be an important strategy to save money and for legacy planning. 

You should know that even though you enjoy direct tax benefits with retirement plans, there are important considerations when selecting the type of retirement plan for your medical practice:

• Do you have employees?
• How aggressive do you want to be with retirement savings?
• What type of investments do you want in your retirement plan?

If you think your practice can benefit from a retirement plan, it is best to consult with a tax accountant or financial advisor to determine which plan will be most suitable for your needs. 

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