Thinking about April 15 often sends shivers down the spines of most, including owners of veterinary practices. With liability issues, increased regulatory burdens and an ever-changing tax code, many veterinarians don’t have the time to keep up with all the different financial aspects of the job, which is why most hire some sort of accountant or bookkeeper.
Tom McFerson, CPA, ABV, with Gatto McFerson in Santa Monica, Calif., which specializes in helping veterinary practice clients make sound business decisions, effectively handle financial and accounting needs, and grow their practice, said his firm recommends veterinarians stay organized and watchful to keep tax season from being a burden.
“We let our clients know that every quarter they should be assessing everything—looking at profits and where they’re at and how it all compares to the year before,” he said. “There are a lot of fluctuations on a month-to-month basis, but if you look by quarter, it’s usually a pretty good indicator.”
John Blake, CPA, partner with the New Jersey-based accounting firm of Klatzkin & Co. LLP, who specializes in taxation of small businesses, said one of the most important things that business owners and veterinary clinics can do to make a difference during tax season is to keep good contemporaneous records.
“Also, when it is near year-end, it would be beneficial for the clinic owners to make sure that they have a good handle on what their inventory is,” he said.
Most accountants do their job really well, but it’s crucial for veterinary clinics to ensure their accountant assists them in planning on how to help structure the clinic.
“Is your clinic trying to maximize profit sharing for the owners, or is it trying to keep the most funds at hand to expand?” said Bijan Golkar, CFP, senior advisor for FPC Investment Advisory Inc., in Petaluma, Calif. “If so, you and an accountant must be on the same page and plan this together.”
Depending how the clinic is organized, one of the biggest mistakes that are made by veterinarians come tax time concerns owners who are self-employed.
“Many times we find they may not have made estimated payments,” Blake said. “If these payments aren’t made, not only will the owner have a large tax bill but she also could be penalized and charged interest.”
Also, inventory on hand and its value could have an impact on the clinic’s income.
Golkar finds that many small business owners do not keep organized, so it’s always a mad dash at the end to complete taxes.
“If you aren’t organized, how do you expect an accountant to help you do planning? Now that taxes are done for this year, you should already be thinking about next year,” he said. “The biggest mistake is not thinking of it as a year-round job.”
And you never want to be late. The IRS adds an automatic 0.5 to 1 percent penalty per month to an income tax bill not paid on time, he said, adding that penalties for failing to make payroll tax deposits on time are much higher.
The biggest mistake McFerson sees is veterinarians that let tax season creep up on them so by the time they focus on tax planning, it’s too late and harder to maneuver. They need to monitor everything all year long.
“The real problems begin if they fall behind on their payments,” he said. “Maybe profits are higher than expected, they skipped a quarterly payment, or they are basing those quarterlies on business from last year and have had a more profitable year. All of that can really put them behind the eight ball.”
Don’t go crazy with tax deductions. Claiming too many expenses could raise a red flag with the IRS, McFerson said. For instance, if you have a vehicle that you use for work and personal use, be sure to log all the miles that it’s used for things like house calls or marketing, and not just guess about when it’s in use for work and not. Additionally, travel, entertainment and food are all areas that the IRS looks at closely for abuse, so keep records of everything, he said.
Lower your liability
While claiming too many expenses is a bad thing, missing out on tax deductions one is entitled to is just as damaging to a business.
One of the easiest ways to earn deductions is by maximizing a retirement plan—for both the owner and staff.
“Or maybe you do some capital expenditures because the building needs some work, and that’s something they could do before the end of the year,” McFerson said. “New equipment also can generate deductions and at the same time help out the practice.”
Additionally, rather than investing $30,000 on a new computer system, McFerson said a business can finance a system or do a capital lease, and it still will be able to write off the full amount for the year, even if it puts down only a small payment toward the purchase.
“It’s a nice way to generate some deductions without spending a lot of money,” he said.
For new practices, owners can claim up to $5,000 in their first year and similar amounts over the next 15 years for expenses related to getting the business off the ground.
Other deductions that vet practices often miss out on include business services, such as using PayPal, interest on credit cards and personal loans if they are work-related, continuing education and costs for unused inventory.
Keep in contact
Most veterinarians will use an accountant or personal bookkeeper to help with taxes each year, and the key to ensuring everything goes correctly is proper communication.
“If your accountant isn’t informing you of law changes and keeping in contact to see if anything has changed throughout the year, then chances are they aren’t doing their best to help plan the best possible tax returns,” Blake said. “If the tax planning is done effectively, then the tax code could be maximized in the best interest of the clinic owner if there is an open dialogue and continued interaction.”
A good relationship is made stronger every year, and if veterinarians listen to the advice of their accountants and make the changes they suggest, tax season will go a lot smoother.
Tax changes for 2017
Just like every year, there are changes to small business tax laws that practice owners must know about for the 2017 cycle. The problem is that this year is one of those where things seem to be in flux because President Donald J. Trump has announced a vague outline of what he would like to see the tax structure look like.
“President Trump has proposed three tax rates as opposed to the current six tax rates,” said John Blake, CPA, partner with the New Jersey-based accounting firm of Klatzkin & Co. LLP. “The issue is that we have no idea what the income brackets will be and when these new rates will go into effect.
“For example, under the current law, if you have taxable income of $100,000 you are in the 28th percentile bracket, but under Trump’s plan you could be in the 33rd percentile bracket. This year, it is important to be diligent and take a wait-and-see approach. It could be more beneficial to recognize income in 2017 if the tax structure remains the same than recognizing the income in 2018, when it could be possible that the tax structure would cause more tax.”
Some big things are afoot for small business taxes, said Bijan Golkar, CFP, senior advisor for FPC Investment Advisory Inc., in Petaluma, Calif.
“Clinics need to put off any big changes or investments until we have some clarity,” he said. “If a clinic is thinking about incorporating, they will want to make sure they choose one that allows flexibility depending on how the laws change.”
|SMART TAX TAKEAWAYS|