Last-Minute Year-End Med Spa & Dental Practice Income Tax Strategies
The purpose of this article is to reveal how you can get the IRS to owe you money.
Of course, the IRS will not likely cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2023.
1. Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2023 prepayments cannot go into 2025. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 29, 2023, you mail a rent check for $36,000 to cover all of your 2024 rent. Your landlord does not receive the payment in the mail until Tuesday, January 2, 2024. Here are the results:
- You deduct $36,000 this year (2023—the year you paid the money).
- The landlord reports $36,000 as rental income in 2024 (the year he received the money).
You get what you want—the deduction this year.
The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
2. Stop Billing Patients
Here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your patients until after December 31, 2023. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Patients and/or insurance companies generally don’t pay until billed. Not billing them is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2023 income by moving that income to 2024.
3. Buy Office Equipment
Increased limits on Section 179 expensing now enable 100 percent write-offs on most equipment and machinery, whereas bonus depreciation enables 80 percent write-offs. Either way, when you buy your equipment or machinery and place it in service before December 31, you can get a big write-off this year.
Qualifying Section 179 and bonus depreciation purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
4. Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But suppose you operate your business as a corporation and are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
5. Don’t Assume You Are Taking Too Many Deductions
If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.
You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.
What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.
6. Deal with Your Qualified Improvement Property (QIP)
QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date the building was placed in service.
The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for
- immediate deduction using Section 179 expensing, and
- 80 percent bonus and MACRS depreciation.
To get the QIP deduction in 2023, you need to place the QIP in service on or before December 31, 2023.
2023 Last-Minute Section 199A Tax Reduction Strategies
With all that happened in 2023, it’s easy to forget your Section 199A deduction.
You may remember that the Tax Cuts and Jobs Act (TCJA) gave many pass-through businesses the Section 199A deduction as a no-effort, do-nothing 20 percent tax deduction based on defined business income.
For example, with defined qualified business income (QBI) of $100,000 and defined taxable income of $100,000, you qualify for a $20,000 Section 199A deduction that you claim on your Form 1040. You didn’t have to do anything to get this deduction.
One thing to be aware of: tax planning that reduces your business income can also reduce your Section 199A deduction. For example, let’s say you buy $40,000 of equipment and expense it. Now your QBI is $60,000 ($100,000 – $40,000) and your 199A deduction is $12,000 ($60,000 x 20 percent).
Your planning for the Section 199A deduction requires more attention if your 2023 QBI exceeds the threshold— $170,050 (or $340,100 on a joint return).
In this article, we bring you three Section 199A strategies you can implement before December 31, 2023, to help you obtain your optimal deduction.
First Things First
If your Form 1040 taxable income is above $170,050 (or $340,100 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.
The combinations can create confusion, but you can lessen the confusion by using the 2023 Section 199A calculator.
For a refresher on what is QBI see IRS Issues Final Section 199A Regulations and Defines QBI.
Planning point. In general, when planning for your Section 199A deduction, you need to look at:
- Your 1040 taxable income. This determines your eligibility for the 199A deduction.
- Your QBI, wages paid, and type of business (in-favor or out-of-favor). This determines the deduction, which is limited to no more than 20 percent of your taxable income less capital gains.
The 2023 Section 199A calculator helps you do this on a business-by-business basis. If you have more than one business, spend a few minutes with Caution: 199A Calculator Is Business-by-Business without Aggregation.
If your Section 199A deduction is less than 20 percent of your QBI, consider using one or more of the strategies discussed below to increase your deduction.
Strategy 1: Harvest Capital Losses to Reduce Taxable Income
Capital gains add to your taxable income.
- Taxable income determines your eligibility for the Section 199A tax deduction.
- Taxable income less capital gains sets the upper limit (ceiling) on the amount of your Section 199A tax deduction.
If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.
Strategy 2: Make Charitable Contributions to Reduce Taxable Income
Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year. Consider doing one or both of the following:
- Donate appreciated stock, as we discuss in 2023 Last-Minute Year-End Tax Strategies for Your Stock Portfolio.
- Prepay (before December 31,2023) your planned 2023 charitable contributions so you can claim them as deductions this year.
Strategy 3: Buy Business Assets
Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2023.
The big asset purchase can help your Section 199A deduction in two ways:
- It can reduce your taxable income and increase your Section 199A deduction when the write-off can get your taxable income under the threshold.
- It can contribute to an increased Section 199A deduction if your deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in qualified property immediately after acquisition (UBIA). In this scenario, your asset purchases increase your UBIA, which in turn increases the deduction you already depend on.
Takeaways If your 2023 taxable income is over $170,050 (or $340,100 on a joint return), you could face a reduced or eliminated Section 199A deduction.
In such cases, consider using one or more of the three strategies described in this article to reduce your taxable income and increase your Section 199A deduction.
The three strategies are as follows:
- Harvest capital losses if you have capital gain income that’s causing the trouble.
- Make charitable contributions to increase your itemized deductions and reduce your taxable income —and to come out even better, consider donating appreciated long-term-gain stock.
- Buy and place in service before midnight on December 31, 2023, business assets you can expense 100 percent to lower your taxable income. (This also reduces your QBI, but if you need lower income to gain the Section 199 deduction, the asset purchase is a good strategy.)
Maximize Year-End Tax Benefits for Med Spa and Dental Practice in 2023
Explore our savvy tax-saving strategies tailored for your portfolio, ensuring a financial glow as we approach the end of the year. Here’s the essence of our tax-smart approach:
Key Financial Insights:
- Steer clear of elevated taxes, reaching up to 40.8 percent, on short-term capital gains and regular income.
- Minimize taxes to zero or a maximum of 23.8 percent by strategically classifying profits under long-term capital gains.
Strategic Overview:
Dive into the seven essential tax rules to sculpt the financial aesthetics of your stock portfolio:
- Short-term capital gains and ordinary income attract federal taxes up to 40.8 percent, combining the top income tax rate and the 3.8 percent Affordable Care Act tax.
- Long-term capital gains and stock dividends face tax rates ranging from 0 to 23.8 percent.
- Capital losses deductions are capped at $3,000, with excess losses carried over to future years.
- Prioritize offsetting long-term gains and losses before tackling short-term gains and losses.
- Consider donating appreciated stock to charity for additional tax benefits.
- Offset capital losses by selling additional assets, preventing loss carryovers from diminishing.
- Leverage lower tax brackets by gifting appreciated stock to family members with lower tax rates.
Strategic Moves:
1. Offset Gains and Losses with Precision
Review your portfolio for potential sales, strategically offsetting high-taxed short-term gains with lower-taxed long-term losses, thereby eliminating or reducing taxes significantly.
2. Harness Long-Term Losses for Maximum Deduction
Employ long-term losses to claim the $3,000 deduction against ordinary income, creating a powerful tool to combat higher tax rates.
3. Dodge the Wash-Sale Rule
Evade the wash-sale loss rule by refraining from purchasing substantially identical securities within 30 days of selling, preserving your ability to recognize losses in 2023.
4. Optimize Loss Carryovers
Avoid losing capital loss carryovers by selling additional assets to generate offsetting gains, ensuring they don’t vanish upon your demise.
5. Capitalize on Lower Tax Brackets
Enhance family benefits by gifting appreciated stock to family members in lower tax brackets, capitalizing on the disparity in tax rates.
6. Elevate Charity Contributions with Appreciated Stock
Boost tax benefits by donating appreciated stock to charities, enjoying deductions based on the fair market value while avoiding taxes on the stock sale.
7. Preserve Stock Loss Deductions
Steer clear of donating stock losses to charity, as selling the stock first allows you to claim the tax-deductible loss before contributing the cash proceeds to the charity.
In Conclusion:
Embrace these seven strategies to infuse your portfolio with tax-planning vitality. From supporting charity to aiding family members, optimize your financial well-being and minimize your tax burden. With careful planning, you can revel in the joy of offsetting gains and losses, ensuring more money stays in your pocket and less goes to the taxman. As we approach the year-end, act promptly—optimize your portfolio for tax deductions by December 20, 2023, to savor the benefits without any last-minute stress.
Smart Year-End Tax Strategies for Med Spa and Dental Practice
As the end of the year approaches, Med Spa and Dental practitioners should turn their attention to strategic financial planning to optimize their tax positions. By implementing effective year-end tax strategies, you can potentially reduce your tax liability and improve your overall financial health. Here’s a guide for Med Spa and Dental practices seeking to make the most of year-end tax planning:
1. Capitalize on Section 179 Deductions:
Dental practices can benefit from Section 179 deductions by expensing the cost of qualifying equipment in the year it’s placed in service. Evaluate your equipment needs and consider making necessary purchases before the year-end to take advantage of this deduction.
2. Retirement Plan Contributions:
Maximize contributions to retirement plans, such as 401(k)s or SEP IRAs. Not only does this help secure your financial future, but it also provides current-year tax benefits by reducing taxable income.
3. Evaluate Business Structure:
Consult with a tax professional to assess your business structure. Depending on your circumstances, restructuring as an LLC or an S Corporation might offer potential tax advantages. Each structure has unique benefits, so it’s crucial to choose the one that aligns with your business goals.
4. Leverage Employee Benefits:
Provide year-end bonuses or additional employee benefits. These can be deductible business expenses, fostering employee loyalty while simultaneously reducing your taxable income.
5. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs):
Encourage employees to contribute to HSAs and FSAs. These accounts offer tax advantages as contributions are made on a pre-tax basis, providing a valuable benefit for both employers and employees.
6. Research Tax Credits:
Explore available tax credits for the healthcare industry. Some credits may apply to energy-efficient improvements, employee retention, or other qualifying activities. Researching and leveraging these credits can result in significant tax savings.
7. Stay Compliant:
Ensure your dental practice is compliant with all tax regulations and reporting requirements. Staying on top of compliance helps avoid penalties and ensures a smooth tax-filing process.
In conclusion, proactive year-end tax planning is crucial for Med Spa and Dental practices looking to enhance their financial position. By strategically managing your finances, you not only reduce your tax burden but also position your practice for continued success in the coming year.
