Hidden treasures in your practice's tax return
Why you should think of the IRS, even in June
Sure, the tax deadline just passed. Your accounting department, and your accountants, are probably heaving a big sigh of relief and enjoying a well-earned rest. But now is the perfect time to do a tax evaluation for your practice, says Brent Thomas, CPA, MBA, partner with the accounting firm Thomas Doll & Associates in Walnut Creek, CA.
"I always encourage my clients to see me in May to talk about their tax situation," says Thomas, whose practice works only in the medical field. "But not all of them do. I don't hear from many of them again until December if I'm lucky, or even as late as February, right before the next tax deadline."
Take advantage of equipment write-offs
Thomas says there aren't many changes to the tax law that will apply to most practices and most of the physicians in them. Among those that can affect you is an increase of $500 to $18,500 on the amount you can spend for new equipment for your practice.
Many practices don't take full advantage of this write-off, says Thomas. They will spend a couple thousand dollars per year, and then in one year, spend $30,000 or more, not all of which can be deducted as a business expense. "A better tactic is to spread those costs out so that you can take those deductions," he says.
Similarly, Thomas sees a lot of practices spending tens of thousands of dollars on remodeling and renovating their offices. "But you have to write off leasehold improvements over 391¼2 years. It's better if you spread out those things like repapering your walls and repainting over a longer period of time. Then they can be written off as repair and maintenance."
Although many people would rather not look at their tax returns again after sending them to the Internal Revenue Service, Thomas says they can be valuable tools for your practice. In particular, there are four things you can learn.
1. Collections.
Use your return to look at your practice's collections as a function of billing, says Thomas. "Are you collecting what you should?" he asks. Your accountant, the Medical Group Management Association in Englewood, CO, or another professional group you have ties to should be able to help you determine how your collection activity compares to other practices.
2. Production.
How does your production - your gross income - compare to other practices? And taken a step further, look at your production per physician. "A lot of doctors think that managed care means that they should be rewarded for practicing smarter medicine not for producing more," says Thomas. "But the truth is you have to run faster these days. To succeed, you have to produce more. Information on production as a practice and for individual physicians, is important to that success."
Thomas says you should also look at production as compared to physician salaries, too.
3. Interest income.
If you see your interest income declining, you have to find out why, says Thomas. It may be a sign of something serious, or it may not. One practice he works with had a decline of 20% in interest income. The physician in question left Thomas' office with a mission to find out why he wasn't able to build up a cash reserve.
4. Expenses.
Trending this data is important, but it isn't the only step, according to Thomas. One practice felt proud that expenses had only gone up 3%, or $41,000, over the course of the year. But Thomas was quick to point out that inflation last year hovered around 1%. "That 3% was three times the national average," he says. "That practice needs to find out why the increase was as large as it was."
The biggest expense category for any practice is labor. Thomas says in a tight job market such as most cities are currently experiencing, you really have to look closely at this category. Compare your pay scales to similar practices (again, using data from your own accounting and consulting firms, the MGMA, or other organizations), and make sure that you are NOT paying your staff members the average.
"You have to do better than that. If you find your labor costs are high, look instead at the number of employees you have and your skill level. Don't necessarily assume you are paying them too much. You may just be overstaffed with people who don't have the training or experience you need."
Thomas says you should look at the total labor costs - salaries and benefits - and divide them by the number of hours worked during the year to get an average hourly wage for each class of employee. He says that makes it easier to compare to national data.
Nonmonetary benefits
If you find that your salary costs are high, but you don't feel you can afford raises, there are some tax friendly options you can take, says Thomas. (For some other ideas on how to make staff feel appreciated for little money, see story, p. 78.) Any practice with one employee who spends $5,000 per year on child care can take advantage of laws regarding cafeteria plans for benefits. These plans allow employees to have money withheld from their salary pre-tax and applied to specific items, such as child care, or medical expenses that are not covered by the practice's medical plans.
"The break-even point for these plans is about $5,000," Thomas says. "The employee sees a reduction in salary of $5,000, which means the practice saves on payroll taxes. The employee does lose $480 in the per child tax credit but saves about $2,000 in taxes over the year. That's like a $1,500 raise that costs you nothing."
Thomas says a lot of practices don't look as these kinds of benefits as worth their while. But they not only save the practice some money, they also improve morale and are a benefit you can use to lure and retain good employees.
Physicians are always urging their patients to come in for regular checkups. Thomas says they should take their own advice and see their accountants annually for a tax checkup, too.
· Brent Thomas, CPA, MBA, partner, Thomas Doll & Associates, Walnut Creek, CA. Telephone: (800) 877-0564.
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