Time flies, and it’s almost the end of the year!
As the holiday season comes and goes, it leads to perhaps the most joyous season of all…
…Tax Season!
Okay, that might be a slight exaggeration. With less than a full month left until the year ends, there are still steps private practice owners can take to prepare and plan for 2022 taxes.
The general levers at your disposal to impact taxes over your lifetime are going to be:
With that in mind, there are some last-minute levers to pull for 2022. Let’s dive into year-end tax planning considerations specific to practice owners!
Keep accurate bookkeeping
With all the fun and shiny tax tips you’ll find out there, one of the simplest ways to avoid overpaying taxes is to not accidentally over-count income or miss deductions in your bookkeeping.
Take a good look at your financial statements, and next year aim to do this throughout the year.
It’s a lot easier to catch and remember mistakes as they occur, rather than trying to figure it all out at the end of the year. Your tax pro won’t know what happened in the practice day-to-day.
Regularly check your account connections. Reconcile each account. Review your financial statements each month to catch mistakes as they happen.
Work with a good bookkeeper throughout the year that knows optometry. It’s well worth the investment, and I’m happy to recommend a few.
Check your withholding and estimated tax payments
A pain point I run across is simply not being prepared for the tax. A higher-than-expected tax bill in April is frustrating and can sometimes cause a cash crunch. Depending on how short, you may even owe a bit of a penalty.
Chat with your financial advisor and/or tax pro, send them your most recent pay stubs and estimated payments, and have them run a projection for you. Is there a gap? How much? This is the time I’m wrapping up year-end tax projections and working with CPAs/EAs to iron out any planning details.
The IRS has a Tax Withholding Estimator, and companies like Turbo Tax have a withholding calculator, too.
Keep in mind it’s total household withholdings/payments that matter. If your spouse works, don’t forget to include his/her income and tax withholdings.
You have a few more runs of payroll to withhold before the end of the year, or potentially a bonus. And there’s always a January estimated tax payment or paying at tax time.
Qualified Business Income (QBI)/199A Deduction
Confusing businesses everywhere since the 2017 Tax Cuts and Jobs Act, the QBI deduction is a 20% deduction from essentially practice net income (profit). You’ll find this on your 1040 personal tax return if you own a “pass-through” business, such as a sole proprietorship, LLC, partnership, or S-corporation. 1099 optometrists benefit from this too!
This can be an important planning point. Keep in mind the phaseouts for the deduction.
If you’re single, the deduction starts to phase out when your taxable income (before the deduction) hits $170,050, and entirely at $220,050. If married filing jointly, the phaseout range is $340,100 – $440,100 of taxable income.
If you find yourself in the phaseout range or above, consider doing what you can to lower your taxable income through various deductions to become eligible or increase the deduction.
Retirement Accounts
Retirement accounts in and out of your practice are some of the biggest levers you have to control taxes this year and beyond.
In the practice, you may have a SIMPLE IRA or 401(k).
A SIMPLE-IRA allows you and your employees to contribute up to $14,000 in 2022 ($17,000 if over 50). These are pre-tax dollars that lower your gross income. The match your practice provides is a deduction from business income.
The 401(k) is where the magic happens. With a 401(k), you have 3 different layers to get money into the plan:
The Employer Portion is the combination of matching and profit sharing, up to 25% of total employee compensation. This is one of many reasons it’s important to pay yourself a reasonable wage if you own an S-corporation.
The grand total max with all three is $61,000 in 2022 – $67,500 if over 50! As both an employee and the employer of your practice, you get to control all three layers.
Consider a profit-sharing contribution to the plan, a deduction from business income that allows the funds to grow in the 401(k) plan.
Profit-sharing contributions add to all participants in the plan based on a set formula. It can often lead to a much larger contribution for you (the owner), and the tax savings can be worth adding dollars to your employees’ accounts. You may simply want to help contribute toward their retirement. The tradeoff is something you need to weigh for yourself.
Talk with your financial advisor, your 401(k) plan’s Third-Party Administrator, and your tax pro to figure out whether to do profit sharing, how much, and how to do it correctly.
With the employee contributions, you may be able to choose either pre-tax or Roth contributions. It’s a careful balance – defer taxes into the future for a deduction now, or pay taxes now and let it grow tax free? Think long-term about lifetime taxation, especially later in retirement.
If your plan allows after-tax contributions, they won’t impact taxes this year. But they allow for a “mega-backdoor” Roth contribution in the 401(k) plan.
1099 optometrists can use all of this too, through a Solo-401(k) plan!
Deadlines: The deadline for employee contributions is the end of the year, so check whether you’re on track and how many pay periods you have left.
The deadline for matching, profit sharing and after-tax contributions is your business’s tax filing deadline, including extension. It’s one of the few major tax levers you have after the new year.
Purchasing equipment (and other specific types of business property)
Planning to buy that OCT soon? It may make sense to do that before the end of the year.
When you buy practice equipment, you get to “recover” (depreciate) the cost over its “useful life”. In this case, let’s say over 5 years. This gives you a deduction against your business income – yay tax benefit!
You can also choose to deduct it in the year you buy and put it in service.
Section 179 of the tax code (and its cousin, Bonus Depreciation) allows you to deduct the full equipment cost in the year it’s placed in service. So, you buy the OCT and get it installed and available for patients.
Let’s say you’re firmly in a combined 30% tax bracket, a $50,000 deduction saves you $15,000 in tax.
Don’t let taxes drive the decision here. You want to only buy equipment with a true business need because you’ll need to spend the full $50,000 to get $15,000 back.
Unless there’s a clear ROI on the purchase, you’ll just lose money on the deal. I’ve seen and heard too many stories about purchases just for taxes, and then just collecting dust or putting the OD in a cash bind to start the year.
Start with business needs and cash flow, then plan for taxes as best you can.
Also, think carefully about whether it really makes sense to accelerate the whole deduction into one year, or whether it makes more sense to spread it out.
Year-end business retreats and the Augusta Rule
If you’re planning a year-end leadership or staff retreat, talk to your tax pro about the “Augusta Rule”.
The IRS allows you to rent your residence for up to 14 days per year and not report the rental income on your tax return.
Business meetings like strategic retreats are tax-deductible to the business. So, it helps shift income from your business’s (really, your) tax rate to a 0% tax rate. Not bad!
Work closely with your tax pro to do this correctly. You need to have a clear business purpose for the meeting. There must be a rental agreement, rent must be fair market value, and so on. Like all things, documentation is important. It has to pass the sniff test.
Paying your kids for work
One great thing about owning your own business is that you can pay your children for the work they do in the business!
Not only do you get to spend more quality time with them (though I’m not sure they’ll always see it that way), but you also get to deduct the wage as a business expense.
The kids pay taxes at their tax rate. That could be 0% federally, if under the standard deduction amount ($12,950 in 2022). Each state will have their own standard deduction and exclusion amounts, but it’s likely still lower than your tax rate.
If you own an S-corporation, the wages are subject to FICA and federal unemployment taxes. But not if you own a single-member LLC (not taxed as an S-corp) or partnership where both parents are the only partners.
Lastly, since your kid now has earned income, you can make Roth IRA contributions on their behalf! Think of all the years of compounding growth you’ll start for them.
Check closely with your tax advisor. They need to be doing real work with a real business purpose, appropriate for their ages. Cleaning, filing, answering phones, tech work, and even child modeling for marketing.
You need to pay a reasonable wage, and there needs to be documentation. There are also federal, state and local child labor laws to comply with.
Other “ordinary and necessary” expenses
Talk with your tax pro about all the other day-to-day stuff that you legitimately use for your business. A few examples of other “personal” expenses that may have ordinary business use are:
- Home office deduction
- Cell phone expenses
- Business Mileage with your personal car (all those conferences!)
If you own an S-corp, chat with your tax pro to make sure you’ve set up an Accountable Plan. That’s basically an IRS-approved employee reimbursement plan that helps support reimbursing you for these expenses.
The Bottom Line
Phew! You made it to the end! There are so many things to think about with taxes. Health Savings Account, Roth IRAs, tax-loss harvesting in a taxable investment account, bunching charitable donations, reviewing your business entity for the future, prepaying expenses, and so much more!
Check out Dr. Vitto Mena’s personal tax tips in his December newsletter article, End-of-Year Tax Planning – An Optometrists Perspective.
Hopefully, this spurs a bit of year-end discussion. There’s a lot of oversimplification here – talk with your financial and tax advisors to see what’s possible.
Keep a long-term perspective on tax planning, and keep both your practice and household finances in mind. Sometimes it makes sense to delay paying tax on income, other times to add more income into the year. To spread deductions out, or to accelerate them into the current year.
With that, happy holidays, Merry Christmas, and a Happy New Year to all!
