Tax Deductions Your CPA May Be Missing

by Richard A. Blum, CPA, JD, LL.M. Senior Tax Manager, Elliot & Warren, PLLC

Many doctors are overpaying their tax liabilities by thousands of dollars each year by failing to properly deduct expenses to which they are entitled. To help doctors keep more of their hard earned money, here is our list of the most overlooked tax deductions they should be aware of:

• Self-employed health insurance deduction - Doctors who operate as sole proprietors, unincorporated partners, or as S corporations receive only a partial deduction for health insurance premiums paid on behalf of the doctor, his spouse and dependents. This deduction is equal to 70% of the premiums paid in 2002 and 100% in 2003 and thereafter. Unfortunately, many doctors who qualify for this deduction fail to claim it on their individual income tax return.

• Section 179 expensing election - The tax law generally allows doctors to immediately deduct the first $24,000 of new or used equipment purchased in 2002 ($25,000 in 2003), rather than depreciating it over a 5-7 year period of time. However, this election is often overlooked resulting in taxpayers depreciating the equipment over the longer period. We recommend making this election and claiming the maximum section 179 expense in order to accelerate the deduction and pay less tax now.

• Additional 30% "bonus" first-year depreciation deduction - A new tax law created an additional 30% "bonus" first-year depreciation deduction for many types of assets acquired generally on or after September 11, 2001, and before September 11, 2004, if several conditions are met. The new law also increased the allowable first-year depreciation deduction limit for so-called "luxury autos" placed in service in 2002 from $3,060 to $7,660. Many CPAs have failed to claim this 30% bonus depreciation which accelerates the write-off of assets resulting in paying less tax now.

• Business cars - Many tax return preparers fail to realize that certain automobiles used more than 50% for business are not subject to the "luxury auto" limitations. Specifically, qualifying sports utility vehicles, trucks and vans with a Gross Vehicular Weight Rating (curb weight plus load capacity) of more than 6,000 pounds are not subject to the "luxury auto" limitation. Consequently, the purchase is eligible for the $24,000 Section 179 expensing election (explained above), then the additional 30% "bonus" first-year depreciation deduction (explained above), and the balance of the cost can be depreciated over the normal 5-year period. The failure of the CPA to note when the "luxury auto" limitation does not apply could result in the doctor significantly overpaying his tax liability.

• 100% deduction for travel, lodging, staff meals and continuing education - Many tax returns lump together expenses for travel, meals, lodging, entertainment and continuing education into one category called "travel and entertainment". Consequently, the doctor's CPA mistakenly deducts 50% of this amount, even though some of these expenses are 100% deductible. For example, expenses for business travel, lodging and continuing education are 100% deductible. Also, expenses for recreational, social or similar activities primarily for the benefit of staff employees, such as costs of staff meals, outings and holiday parties, are also 100% deductible.

  This error can be avoided by having the doctor's financial statements and tax returns be prepared using separate expense classifications for "travel and lodging", "continuing education", "employee benefits" and "meals and entertainment". Only the "meals and entertainment" expenses would be subject to the 50% deduction limitation.

• Charitable contributions deduction - Many corporate tax returns show large amounts of charitable contributions which are disallowed on the tax returns under the 10% limitation rule. Under this rule, the charitable contributions deduction for corporations is limited to no more than 10% of the corporation's taxable income. To avoid this limitation, the doctor may consider whether he expects to receive some future benefit from the expense (e.g., getting a new client), in which case they can be properly classified as "advertising and promotion" which would be 100% deductible.

  If the expense cannot be classified as "advertising and promotion", the doctor should make the charitable contribution personally and deduct it on his individual income tax return. Commonly overlooked charitable contribution deductions on doctor's returns include gifts of tangible personal property such as household items, appliances, clothing and other items given to charities (25-30% of original cost is usually deductible), travel expenses to charitable work or events ($.14 per mile), as well as all out-of pocket expenses incurred in rendering services to a charitable organization.

• Education tax credits - We strongly recommend that doctors have their college age children pay for college educational and related living expenses from their own funds, custodial accounts or from distributions from a family partnership, thereby allowing the children to claim the HOPE Educational Tax Credit ($1,500 a year during the initial two years) and Lifetime Learning Tax Credit ($1,000 tax credit during remaining years, increasing to $2,000 beginning in 2003). While each child could qualify for as much as $5,000 in these tax credits over the course of his college career, which would shelter about $32,000 of taxable income, we see few tax returns actually claiming this credit.

• Accelerating office building write-offs - Many tax preparers mistakenly lump together all expenses incurred in the construction, remodeling or expansion of an office building into its cost, thereby depreciating the entire cost over 39 years using straight line depreciation. We have done cost segregation studies for such doctors whereby we segregate out certain building construction expenses for write-offs over shorter periods of time. For example, as a result of a recently completed study we performed for a doctor, we saved him $11,000 of taxes on a $300,000 remodeling project. This is a great way for doctors to save taxes when they build, remodel or expand their offices.