The Tax Bill: How Will It Affect Your Practice?
Amanda Carrozza is a freelance writer and editor in New Jersey.
A veterinary accountant explains how the Tax Cuts and Jobs Act of 2017 could affect your practice.
When President Donald Trump signed a new tax bill in late December 2017, shock waves rippled throughout the country. Some rejoiced in the business incentives, while others groaned about higher premiums. For the most part, however, people were just confused. When would the plan take effect? How would earnings be impacted? What deductions were being eliminated?
Now that the dust has settled, a clearer picture has emerged about how the tax bill will impact individuals and businesses. We spoke with Camala Bailey, CPA, CVA owner of CPA 4 Pets in Tempe, Arizona, about the elements that are more likely to affect veterinary practices and their owners.
Pass-Through Entities and C Corporations
One of the most notable changes brought forth by the Tax Cuts and Jobs Act of 2017 pertains to pass-through entities, Bailey said, which include veterinary practices that are partnerships, S corporations and sole proprietorships. Under the new tax law, owners of pass-through entities can deduct up to 20 percent of their net business income from their personal tax returns. This deduction is currently scheduled to last through 2025.
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Companies set up as C corporations will also experience new tax implications beginning this year. “Previously, C corporations’ tax rates ranged from 15 to 35 percent based on income,” Bailey explained. “Under the Tax Cuts and Jobs Act, there is going to be a flat corporate tax rate for all corporations of 21 percent.”
Do these changes impact whether a veterinary practice should file as a C corporation moving forward? According to Bailey, who serves on the editorial advisory board for Veterinarian’s Money Digest®, the flat corporate tax rate isn’t enough to sway practices that are already established as pass-through entities. “C corporations will still have what is known as double taxation,” she said. In addition to basic taxes, C corporations are also taxed based on dividends paid to company owners. “That double taxation will still happen with C corporations even if they do have that flat tax rate.”
“I’ve always suggested that it makes more sense for smaller practices to be set up as pass-through entities,” Bailey added. The new tax laws have not changed her mind.
According to Bailey, Section 179 of the tax code has long been a source of confusion and frustration for accountants and their clients. It wasn’t until as recently as five years ago that the government finally made the deductions under Section 179 permanent, with a cap of $500,000. For veterinary practices, this applies mainly to the purchase of medical equipment.
Practices that purchase a piece of equipment up to $500,000 can take Section 179 depreciation on that item and deduct it all in the year of purchase, Bailey explained. “The new tax act allows it to be doubled, so Section 179 now has a $1 million limitation on assets that can be depreciated.”
In addition, Bailey stressed that it’s important for hospital owners to understand what bonus depreciation is and how it can be used. In the past, when a practice purchased an asset, a bonus depreciation was allowed for up to 50 percent of the purchase price in the year of sale, she said. Now, the bonus depreciation has been increased to 100 percent, essentially allowing a company to write off the purchase completely.
One of the most common questions Bailey receives is whether a company should take advantage of bonus depreciation rather than a Section 179 deduction. “Under Section 179 depreciation, your write-off or expense is limited to the income of your business,” she explained. “With bonus depreciation, you can actually create a loss. It is not limited to the net income of the business.”
The Tax Cuts and Jobs Act of 2017 eliminated corporate deductions related to entertainment, which Bailey said is important for business owners to be aware of. Previously, 50 percent of these costs were deductible. In addition, if a business owner provides meals for the benefit of the employer, such as a lunch and learn at the practice, the deduction is limited to 50 percent; in prior years, 100 percent of the cost was deductible.
Planning for the Future
It’s important to note that although many of the changes went into effect in January, the Tax Cuts and Jobs Act of 2017 does not apply to the 2017 tax year, which has a filing deadline of April 17, 2018. To put yourself and your business in a strong position for 2018, Bailey recommends meeting with your tax preparer or accountant well before the end of the year. This will eliminate surprises and allow you to take advantage of programs that might lower your next tax bill, such as funding a retirement plan. Additionally, if you plan to buy a piece of equipment for your clinic, meeting with your CPA beforehand can ensure you time the purchase correctly.