There are several ways to increase your business’ net profit. You can increase your income by seeing more patients, increasing your fees, or taking on other paying gigs such as teaching, writing, consulting, etc.
However, don’t overlook the advantages of either reducing your expenses, or making sure that your expenses are recorded in order to provide for your tax deductions. For every dollar you get to claim as a deduction, you not only save the marginal tax rate (such as being in the 25% tax bracket), but you also get to save the 15.3% in self-employment taxes, which means a combined 42.3% savings!
Most of us are conducting business as sole proprietors (and I include those of us who are partnerships, LLCs, and Subchapter S Corporations, as we all are pass-through tax entities – meaning we complete Schedule C on our 1040s).
By the way, if you have more than one business, you need to complete a separate Schedule C for each one.
Don’t overlook the advantages of making sure that your expenses are recorded in order to provide for your tax deductions. For every dollar you get to claim as a deduction, you not only save the marginal tax rate (such as being in the 25% tax bracket), but you also get to save the 15.3% in self-employment taxes, which means a combined 42.3% savings!
I’ve compiled an alphabetical list of the categories of acceptable business tax deductions. My “Bible” for this is “Schedule C: A to Z. The Sole Proprietor’s Guide to Tax Savings” published by NASE (National Association for the Self-Employed, www.nase.org).
- Advertising – Include expenses for: signs, business cards (great promotions at www.visaprint.com for 500 business cards for $10), online (such as Google pay per click) and print advertising, newsletters, marketing, public relations, promotions, etc.
- Auto expenses – From the Part I article (published in the Spring 2012 issue of Vital News) on home office, remember that mileage between home and professional office is tax deductible. Mileage to and from local meetings, conferences, consults, even having coffee/tea or a meal with someone with whom you are discussing bona fide business, such as referral sources, discussing marketing ideas, or better ways to do your business are all legitimate for deducting your mileage. Remember that you must keep a mileage log!
- Commissions/Fees – This refers to items such as online directory fees, or if you pay a percentage or fee to a referral source, or if you work in a clinic for a 60/40 split – the 40% that you give to the “landlord” is deductible here.
- Depreciation – Most of us spend a lot of money to get our first office started – from equipment and furnishings and such. Under section 179 you can probably write off most of your ongoing capital expenses in one year – although you should discuss this with your tax professional as sometimes it may be prudent to amortize this over the expected life of the purchase (depreciation) such as if you think taxes will be increasing. If your income is low, you also may want to spread out these expenses as you already will be in a low tax bracket and this would help you reduce future income. When you are starting out it almost always pays to use the depreciation tables as your income is lower.
- Employee Benefits – This is probably the biggest potential source of tax savings for you – and will be the focus of Part 3 of this article. There are a lot of advantages for someone who is married and can employ their spouse. Even if just part-time for administrative, bookkeeping, website, etc., you will be able to pay a salary, a wash in terms of self-employment taxes, but this allows you to offer full benefits to your employee, and their dependents, which includes you, making expenses for health insurance, accident insurance, group term life, dependent care assistance, medical reimbursement plans (HRAs – Section 105), educational assistance, bus/parking, all legitimate tax deductions, which means you also get to save the 15.3% self-employment tax in addition to your income taxes…
- Insurance – Not health insurance – that’s an employee benefit, but for malpractice, liability, business interruption, workers compensation, etc.
- Interest – If you have a mortgage for your office (other than for your principle residence), deduct it here, as well as with interest charged on your line of credit, credit card, business loan, etc.
- Legal & Professional Services – This includes a wide variety of services, such as accounting, billing/bookkeeping, legal, business start up expenses, consultation, research, virtual assistant, business coach, etc.)
- Office – This area refers to costs associated with cleaning, coffee/water, office décor, landscaping, window washing, waiting room subscriptions, etc.
- Pension/Profit Sharing – Here is the way to start putting away money for your retirement. These funds are a tax deduction now, so you don’t pay taxes on them and the amount fully goes into whatever investment vehicle you choose, growing tax free (at least until you start taking the money out, when it is taxed). This includes matching contributions to 401(k), SEP, SIMPLE, Keogh, Annuity, Profit-Sharing Pension, Stock (assuming you are a corporation), pension, retirement plan fees, etc.
- Rent or Lease – This is for vehicles you might be leasing/renting, your “outside” office rent, nonrefundable deposits, (but not for home office rent).
- Repairs – These expenses are for general maintenance, repairs, repainting, etc.) Not for improvements (these would be captured under “depreciation”).
- Supplies – The usual office supplies – forms, paper, pens, clips, tape, medical (for items that are considered disposable), computer supplies, stationery, etc. – but not for software (depreciation).
- Taxes/Licenses – This can include a variety, such as employment, business licenses/permits, state B&O (or income) taxes, real estate taxes (if you own property), excise taxes. Not income taxes, nor gas taxes.
- Estimated Taxes – You need to file quarterly unless you, or your spouse, has a position where you have taxes withheld and pay in at least the previous year’s amount of taxes, pay in at least 90% of actual tax obligation, or owe less than $1000. Otherwise you need to pay estimated quarterly taxes or be hit with penalties!
- Travel– Travel must be overnight, must be ordinary and necessary business expense (ordinary is customary for your profession; necessary is what is helpful and appropriate for business), must be reasonable, must be incurred for existing business. Includes lodging, airfare, tips, local transportation (bus, ferry, taxi, tolls, car rental – not your own car, that’s entered under auto expenses), internet/fax connections, etc.
- Meals and entertainment. When conducting business with business associates or employees, while at home or while traveling, and meals alone when traveling overnight on business trip. Meals should be directly related or associated with active conduct of your business – must realistically connect the meal specifically with your business in some way. And remember that the deduction for meals and entertainment is only 50% at most, so it doesn’t pay to pick up the expenses of the other person, unless there is a good reason to do so, otherwise you’ve lost the value of the deduction.
- Utilities – This is for the basics – electricity, heat, water, sewage, trash removal (alarm, telephone and internet are included in Other Expenses).
- Wages – This is for employees, not for yourself. Remember that you will be paying taxes on the income left over from your gross income after business expenses.
- Other expenses – This is the potpourri of expenses, such as for banking, dues, continuing education, professional subscriptions and books, telephone, alarm, internet service, postage/shipping, gifts that are business-related (a maximum of $25/year/recipient, such as a Starbucks card for a referral source, or as a holiday gift to employees, etc.)
Remember that the Schedule C expenses follow these topics, so whatever record-keeping system you use, such as QuickBooks or Quicken, etc., should be set up to look like this so when it comes time to do your taxes, all the categorization is already done for you, and makes it much easier.
Please feel free to contact me if you have any questions or need additional information. I am not an accountant and cannot give tax or legal advice, but I am very educated in this area, and willing to help.