8 places you may be sitting on tax savings
Tom McFerson, CPA, ABV, is partner at the veterinary accounting firm Gatto McFerson in Santa Monica, Calif.
For your veterinary practice and everywhere, 'tis the season to think taxes, "Fa-la-la-la-la la- oh no, already?"
Given the extensive changes in the new 2018 tax law, year-end tax planning will be more crucial than ever. As you begin to focus on useful strategies to reduce your 2018 taxes-both for practice owners and every other veterinary professional-consider the following areas:
For practice owners and managers
1. New equipment is still helpful. Small businesses can still write off the cost of new equipment that's purchased or leased in a given year. Called a Section 179 expense, the provision allows veterinary practices to deduct up to $500,000 in qualifying new equipment (digital radiography or computers, for example) put into service during the tax year. The new tax law also increased the amount of qualifying business property that a business can depreciate in a given year, called bonus depreciation. Both of these provisions may make it financially beneficial for practice owners to launch, expand or simply improve their hospitals.
2. Pass-through deduction is still perplexing. No provision in the new tax law is more confusing or convoluted than the pass-through deduction for small business owners. As background, large corporations were given a significant corporate tax cut in the new law. To help small businesses enjoy a similar benefit, so-called “pass-through entities” are allowed to deduct up to 20 percent of the income earned by the business, with caveats.
A deep dive into the details would be a novella in length, so instead, we'll point out the larger concepts:
> A pass-through entity under this provision is considered to be a sole proprietorship, an S corporation, or a partnership (LLC/LLP).
> Service businesses (veterinarians included) will not enjoy the full benefit of this deduction like other business types do, mainly due to taxable income limitations.
> The deduction is based on your qualified business income, which factors in owner compensation, employee W2s and several other factors.
Again, this area of the new tax law is extremely complicated. Do yourself a favor and talk to a tax professional about your eligibility for this deduction.
3. Solar credit is still around. The solar credit was reportedly on the chopping block but survived in the final bill. This provision (in place through 2019) allows you a tax credit (dollar-for-dollar reduction in your federal taxes) for up to 30 percent of the cost of your solar improvements. The equipment must be purchased, not leased.
For every veterinary professional
4. State and property tax deduction is curbed. A total deduction of $10,000 is now all that's permitted for personal state income and home property taxes on your tax return. This is a low number for most taxpayers, but especially those who live in states with high tax rates or high property values. In the past, a popular tax planning tool was to prepay some of these taxes to get the deduction in the current year. Now, this maneuver likely won't pay off.
5. But other property taxes might not be. On a related note, the limitation on property taxes applies only to your personal residence(s). It does not apply to any rental property you might own. So, if you own the real estate where your veterinary practice sits, there is no limitation on the property taxes that can be paid in a given year. If it makes financial sense, consider paying the second installment now so you can get the deduction in the current year.
6. Your home mortgage balance is important. Anyone with a home mortgage in place prior to Dec. 14, 2017, will still be allowed to deduct the interest paid, assuming the loan balance is $1.1 million or less. However, for homeowners with mortgages initiated after this date, the deduction will be limited to interest paid on the first $750,000 in loan amount only.
7. Child tax credit increased. The new tax law has increased the child tax credit to $2,000 per qualifying child 16 years or younger. Also of interest is a new $500 tax credit for qualifying dependents other than children, such as parents. Both of these credits are subject to overall income limitations.
8. Sign those divorce papers soon. Currently, alimony is considered taxable to the recipient, and deductible to the payer. This will no longer be the case for divorces signed after Dec. 31, 2018. Alimony received will no longer be taxable, and alimony paid will no longer be deductible. Depending on which side of the ledger you fall on, this deadline may make a big difference on your tax returns.
Tom McFerson, CPA, ABV, is partner at the veterinary accounting firm Gatto McFerson in Santa Monica, California.