Today, with the 2007 tax year ended for most veterinarians, all that can be done before the filing deadline is to make the most of existing tax rules - all the while keeping an eye on the practice's potential tax bill for 2008.
Today, with the 2007 tax year ended for most veterinarians, all that can be done before the filing deadline is to make the most of existing tax rules — all the while keeping an eye on the practice's potential tax bill for 2008.
That means making the most of already completed transactions and doing so in a manner that will not adversely affect or reduce next year's deductions.
It also might mean changing your mind about already filed tax returns.
It may surprise many veterinarians to learn that the tax deadlines imposed by our lawmakers are flexible. While the moves one can make to structure transactions for the most favorable impact are limited, postponing the filing of returns or changing your mind on already reported transactions is permitted.
It goes without saying that the Internal Revenue Service wants its money sooner rather than later. That usually means pre-paying an estimated tax bill in four quarterly installments. It also means fully paying the expected bill on or before the deadline, either March 15 or April 15, for most practices, businesses and professionals.
Extensions to make those payments often are granted to specific groups of taxpayers, such as those suffering from a natural disaster or other unusual circumstances. Under special circumstances, a tax payment can be extended for up to six months.
In the past, veterinarians could use Form 4868, "Automatic Extension of Time to File a U.S. Individual Tax Return," for a four-month extension. An additional two months often was available by filing Form 2688, along with an explanation about the need for it.
Today, using Form 4868, any veterinarian can obtain an automatic, six-month extension to file. Naturally, a proper estimate of tax liability is required.
Incorporated veterinary practices and businesses may obtain the automatic six-month extension by submitting Form 7004, "Application for Automatic Six-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns." Form 7004 is used to obtain a six-month extension for filing some excise tax, income, information and other returns.
That automatic extension applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs). Remember, however, that Form 7004 does not extend the time for payment of tax.
Once a return has been filed, if a veterinarian determines the tax bill was incorrect, changes can be made on an amended return. That's right — you can change your mind about many of the income, credits or deductions on an already-filed return.
The IRS reports surprisingly few taxpayers amend their returns to show additional income. But correcting or amending any return because of errors, omissions, mistakes or overlooked deductions — as well as to report additional income — is encouraged.
Generally, a veterinary practice or its principal can have a change of mind about previously reported income and deductions within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later. Should the refund claim involve the deductibility of bad debts or worthless securities, the period is seven years.
Individuals use Form 1040X. A corporation that filed Form 1120 uses Form 1120X to file an amended return.
Why would anyone want to change or amend a filed return?
First, the IRS assures everyone that doing so won't increase the likelihood of an audit.
One might amend because it was discovered that either the first-year write-off or accelerated depreciation method produced a deduction that would be more valuable in a future year when taxable income would be greater.
In another area, perhaps professional fees were claimed incorrectly. Fees paid to lawyers, tax professionals or consultants generally are deducted in the year incurred. If their work clearly relates to future years, however, the expense is deducted over the life of the benefit received.
Another area that's often confusing is deciding whether a veterinarian is an employee of his or her own practice. On several occasions, the courts have ruled that a shareholder who provides substantial services to his or her incorporated practice or business — even an S corporation — is an employee. That means withholding of payroll taxes is required of even the smallest veterinary practice.
Regarding fringe benefits, retirement plans and the like, the majority of shareholder/owners, partners and principals are employees, entitled to reap all rewards offered by the practice. Naturally, those benefit programs cannot discriminate in favor of the owner or shareholder. With the IRS targeting these programs, amending the tax might be a wise, pre-emptive move.
A veterinarian, whether practicing as a corporation, an individual or a partnership, is permitted to deduct all ordinary and necessary expenses of carrying on the practice that are paid or incurred in the tax year. Those usually fall within two broad categories: an immediate expense deduction or a capital expense, one that adds to the value or useful life of property and which usually is deducted by means of depreciation, amortization or depletion.
Remember, however, a large, immediate tax deduction might not be the proper strategy for your practice. One with little or no taxable income, such as a start-up, obviously would opt for smaller write-offs, saving the bulk of those deductions for more profitable years.
On the other hand, after a banner year, making the most of all available deductions could put the veterinarian or his or her practice in a lower tax bracket. Fortunately, there are legitimate strategies that can be used now, prior to filing.
Simply ignoring a deduction for depreciation does not work. That depreciation write-off might not be of much use on this year's return, but it cannot be saved for the next year. The rules clearly say "allowed or allowable," whether computing the amount of gain or loss or the book value of an asset.
At the other end of the equation, the depreciation deduction can be reduced if the practice takes advantage of a unique — and newly increased — first-year deduction for newly acquired property. That so-called "Section 179" first year write-off permits a portion of qualified equipment and asset expenditures to be expensed, or immediately written-off, rather than depreciated over a number of years.
Through 2010, a practice may make, revoke or change a depreciation deduction, even the Section 179 first-year expensing election, without IRS consent on an amended return.
Last summer's tax-law changes provided an immediate 2007 increase in the expensing limit from $112,000 to $125,000, with phase-out levels from $450,000 to $500,000. That $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. Both the $125,000 and $500,000 amounts have been indexed for inflation in 2008 and thereafter.
Obviously, the best time to think about tax strategies is during the course of the tax year. For long-term savings, however, the tax bracket should be consistent year after year. If income is up this year but expected to be down next year, postponing asset sales or other unusual transactions might produce a noticeably smaller tax bill.
Postponing income or profitable transactions until next year when they might not be as likely to put the practice or its principal into a higher bracket often is a legitimate tax-saving strategy. Although the IRS may occasionally disagree, the courts strongly back every taxpayer's right to choose the course of action that will result in the lowest legal tax liability.
Today, thanks to the extended period in which returns can be filed and an even longer period in which to change or amend returns, the so-called "tax season" has become a year-round event.
After all, what better time than now to guarantee that all deductions have been claimed while at the same time incorporating overlooked or ignored tax strategies into your 2008 tax plan?