Given this fact, shouldn’t your advisors be giving you creative ways to legally reduce your tax liabilities? How many tax-reducing ideas does your CPA regularly provide you? If you are like most physicians, you probably get very few tax planning ideas from your advisors.
The purpose of this article is to show you three ways to potentially save and possibly motivate you to investigate these planning concepts before the end of the year. Let’s examine them now:
1. Implement the Proper Corporate Structure for Your Practice
Choosing the form and structure of one’s medical practice is an important decision and one that can have a direct impact on the state and federal taxes you will owe every April 15. Yet, after examining more than 1,000 medical practices of our clients, we believe many doctors get it wrong. Here are a few ideas to consider when thinking about your present corporate structure:
A) You must avoid using a partnership or proprietorship. These entities can be tax traps for physicians. Such practice structures also leave significant holes in a doctor’s asset protection plan. The good news is that doctors who run their practices as a partnership or proprietorship have a tremendous opportunity to save on taxes.
B) If you use an “S” corporation, don’t treat it like a “C” corporation. We estimate that between 60% and 70% of all medical practices are “S” corporations. Unfortunately, many physicians do not take advantage of their “S” corporation status – using inefficient compensation structures that completely erase the tax benefits of having the “S” in the first place. If your practice is an “S” corporation, you also have an opportunity to reduce your tax bill.
D) Get the Best of Both Worlds – Use Multiple Entities. Very few medical practices use more than one entity for the operation of the practice. Successful practices can often benefit from a superior practice structure that includes both an “S” and a “C” corporation. The benefits are both tax reduction and asset protection. If you have not explored the benefits of using both an “S” and “C” corporation to get the best of both worlds in planning, the threat of significant tax increases should be plenty of motivation as this strategy could offset your increased tax liabilities.
2. Explore Investment Managers Who Manage With Taxes in Mind
It is quite well known that most investors in mutual funds have no control of the tax hit they take on their funds. What you might not know is how harsh this hit can be. “Over the past 20 years, the average investor in a taxable stock mutual fund gave up the equivalent of 17% to 44% of their returns to taxes,” according to mutual fund tracker Lipper.
Obviously, over 20, 30+ years of retirement savings, losing one-sixth to about half of your returns to taxes should be unacceptable to you. Nonetheless, too many physician investors settle for this awful taxation.
Even worse is what many mutual fund investors experienced on April 15th the last few years when many of you paid significant taxes on the transactions within your mutual fund even though your fund value declined! Is there anything worse than seeing your mutual fund go down in value and then getting a 1099 tax bill on “gains” inside that fund?
How to avoid this problem? Consider working with an investment firm that designs a tax -efficient portfolio for you and communicates with you each year to minimize the tax drag on that portfolio. In a mutual fund, you have only “one way” communication – the fund tells you what your return is and what the tax cost is. Working with an investment management firm, you get “two way communication” -- as the firm works with you to maximize the leverage of different tax environments, offset tax losses and gains, and other tax minimization techniques. It is not by coincidence that we have two CPAs in our wealth management firm working on these issues with clients.
3. Consider Charitable Giving, Including Conservation Easements
There are many ways you can make tax-beneficial charitable gifts while benefiting your family as well. The most common tool for achieving this “win-win” is the Charitable Remainder Trust (CRT). A CRT is an irrevocable trust that makes annual or more frequent payments to you (or to you and a family member), typically, until you die. What remains in the trust then passes to a qualified charity of your choice.
Another effective tax-planning tool in this arena, but little-known among physicians is the conservation easement. Donors may take a deduction for a “qualified conservation contribution” to a qualifying organization. In effect, a taxpayer can donate land for preservation and take a charitable deduction for the value of the land at its “highest and best” use. A valid qualified appraisal is required. The taxpayer can acquire a membership interest in an LLC which owns property eligible for a conservation easement. The taxpayer can then take part in the contribution of the easement and the tax benefits surrounding such a transaction.
Conclusion
This article gives you a few ideas for how to save taxes. For larger practices with $3 million to $5 million or more of revenue, there are additional techniques that could offer significantly greater deductions. These are outside the scope of this article, but are mentioned in the articles on our website. If you want to save taxes, the most important thing you can do is start looking for members of your advisory team who can help you address these issues in advance. The article’s authors welcome your questions. You can contact them at (877) 656-4362 or through their website www.ojmgroup.com.
Disclosure:This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment, legal or tax advice. There is no guarantee that the views and opinions expressed in this article will come to pass or be appropriate for your particular circumstances. U.S tax and state corporate law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax, employee benefit and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.
