As a medical professional, you have dedicated your life to helping others and improving their health. But do you know how to help yourself and improve your financial health? If you own or operate a medical practice, you may be missing out on some valuable tax planning opportunities that could save you money and help your business grow.
Medical Practice Entity Structure
One of the first steps in tax planning for your medical practice is knowing your current entity structure and whether it’s right for you. This will affect how you report your income and expenses, how you pay taxes, and how you protect yourself from liability. There are several types of entity structures to choose from, each with its own advantages and disadvantages. Here is a brief overview of each one and why a medical practice might prefer one over the other:
Sole proprietorship: Simple
This is the simplest and most common form of business structure. You are the sole owner and operator of your practice, and you report your income and expenses on Schedule C of your personal tax return. You pay self-employment taxes on your net income, and you are personally liable for any debts or lawsuits against your practice. A sole proprietorship is easy to set up and maintain, but it offers no liability protection.
Limited Liability Company (LLC): Protection
For those that want simplicity with liability protection, the Limited Liability Company (LLC) is usually the answer. An LLC protects your personal assets and can be taxed one of three ways: a single member LLC on Sch. C (similar to a sole proprietorship), a partnership, or an s-corporation (both discussed below). Each member receives a Schedule K-1 showing their share of the profits or losses if electing to be taxed as a partnership or s-corporation.
S Corporation: Combination
S-Corporations, which are short for small business corporations, are one of the most popular entity choices, and for good reason. They offer liability protection, simple rules, and special tax saving opportunities. They can support multiple owners and reduce administrative costs, but also have strict election rules, such as no more than 100 owners. As a result, one of the main concerns when electing to be an s-corporation is avoiding a future inadvertent termination.
This is a business structure where two or more individuals or entities share ownership and management of a practice. Partnerships offer unique options, such as limited vs. general partners, different capital vs. income/expense percentages, guaranteed payments, and more. They are generally preferred by those that have complex situations and require an entity that supports a wide variety of forms with liability protection. A business may be an LLC filing as a partnership or a Limited Liability Partnership.
C Corporation: Large
Small businesses usually avoid being a C Corporation due to the double taxation trap. C Corporations pay income tax at the business level, unlike passthrough entities (S Corp and Partnership). Profits are then distributed as dividends to the owners, and those dividends are taxed at the individual level, creating a double taxation event. As such, most small business C Corporations pay bonuses and use other strategies to get the business profit as close to zero as possible. There are benefits to being a C Corporation, but they’re most often large businesses.
Deductions for Medical Practices
Another key aspect of tax planning for your medical practice is maximizing your expense deductions. By properly categorizing and documenting your business expenses, you can reduce your taxable income and save money on taxes. Here are some of the common expense categories for medical practices:
These are the daily costs of running your practice, such as supplies, rent, wages, payroll taxes, advertising, insurance, continuing education, and more. These expenses are generally fully deductible in the year they are incurred.
These are generally larger investments you’ve made in your practice, such as medical instruments, computers, furniture, etc. and deductibility varies. Leases must be classified as capital or operating, and purchased fixed assets need to be depreciated based on their asset class and useful life. Special depreciation elections for Section 179 or bonus depreciation may be available too, allowing you to claim more depreciation in the first year.
Intangible assets have no physical existence but present a value to a company that must be recorded. Has your business acquired client lists or intellectual property from another medical practice? If so, you probably need to set them up as intangible assets and amortize them over a certain number of years, claiming amortization expense each year.
Unfortunately not everything is deductible, and sometimes the most helpful planning tip is sorting that out before the end of the year. For example, mileage is deductible, but only business mileage, and commuting doesn’t count. Another example is meals and entertainment. Meals may be 50% or 100% deductible depending on the situation, but entertainment is not deductible. Personal expenses run through the business must also be reclassified and removed, both to clean up the books and prevent an issue with piercing the corporate veil.
Special Considerations for Medical Practices in Minnesota
MinnesotaCare Provider Tax
You also need to plan for the MinnesotaCare Provider Tax if you operate in Minnesota. The tax rate is 1.6% of gross receipts for 2023 and must be filed annually, with required quarterly estimated tax payments if it exceeds $500 for the year. For more information and resources, please visit the MN DOR website.
The term medical practice can encompass many different small businesses, and many of those businesses sell products and services that are subject to sales tax. For example, certain items sold by a dental practice are taxable in Minnesota, such as mouth guards, toothbrushes, and mouthwash, while others, such as prosthetic devices, are not. Visit the MN DOR website and check out the sales tax fact sheets and industry guides to learn more about what is taxable vs. nontaxable for your specific business.
Working with Haworth & Company, Ltd.
At Haworth & Company, we have over 30 years of experience helping small business medical practices just like yours. We can help you analyze your entity structure, maximize your deductions, claim special depreciation deductions, comply with state tax rules, and more. Whether you need accounting, tax, payroll, or consulting, we’re here to help. Contact us today for a free consultation. We look forward to hearing from you.