Authorities say some practices are observing a decrease in revenue and profits for 2008 as clients defer discretionary procedures and delay bringing in their animals as a direct effect of the volatile economy.
“If the decreasing revenue trend continues, practice profits may be down for the year as compared to 2007 results. Because many practice owners make quarterly estimated tax payments equal to their actual income and self-employment taxes from the previous year, the payments based on last year’s profits may result in overpaying estimated tax payments in 2008 and generating refunds next spring,” according to Lorraine List, CPA, CVA, of Summit Veterinary Advisors LLC.
“Refunds are great, but wouldn’t you rather have the money now than later?” List asks.
“Practice owners should speak with their certified public accountant to determine whether they can safely reduce their fourth-quarter estimated payments this year and still not incur penalties for underpayment of estimated tax.”
List says practices that are growing and making higher profits than last year should consider accelerating deductions into 2008 to reduce income taxes this year.
“Some expenses can be prepaid before year end and still be deductible, such as projected state tax liability, depending on the kind of expense, the practice’s tax method of accounting and whether alternative minimum tax applies,” List adds.
“These practice owners should speak with their CPAs to determine what year-end tax planning is appropriate and to quantify the balance that may be due when the return is filed in 2008.”
The goal is to make a lot of money, then find a way to shelter it under ever-changing tax laws.
Veterinary practices that have elected the cash method of accounting can sometimes defer income taxes in the long run by switching from the cash to the accrual method of accounting, says List. Whether this is appropriate depends on how the practice accounts for inventory and whether it normally owes more to its vendors accounts payable, than is owed to it by its clients.
“Accrual accounting is generally a better representation of a practice’s financial position since the resulting financial statements will reflect inventory on hand, unpaid expenses and uncollected receivables, all of which are important figures in good financial management,” List says.
“There are procedures for changing tax methods of accounting, so veterinarians shouldn’t make this change without good tax advice relating to each practice’s specific circumstances.”
List advises veterinarians to check out employee discount policies.
“In general, the IRS allows practices to discount veterinary services to employees by no more than 20 percent, and products must be sold to employees at no less than cost,” List says. “If your policy is more generous than this, you may be required to report the extra discounts as compensation to your employees on their W-2s. Ask your CPA to explain the rules about employee discounts and how they may impact your practice.”
Managing a veterinary practice can be a constant battle over balancing personal and business deductions, experts say. But leaving tax season paperwork to a CPA and focusing on being a veterinarian can mitigate tax season anguish.
Under the Economic Stimulus Act, Section 179, veterinarians can take advantage of a write-off allowance that caps at $250,000, almost doubling last year’s figure. The bonus is intended as an incentive to spur the lagging economy, making 2008 look like the year to invest in the veterinary practice.
Qualified enterprise zone property and qualified renewal community property have a $285,000 limit. The limit is reduced by the amount in which the cost of Section 179 property placed in service exceeds $800,000.
“Veterinary tax deductions are not much different than other professionals’ taxes,” says Carol Amernick, CPA, located in Virginia. “The goal is to make a lot of money, then find a way to shelter it under ever-changing tax laws. I recommend veterinarians foster a good relationship with a CPA. Trying to figure tax law out on your own is a bad idea.”
Under 179, a first-year bonus of 50 percent depreciation for any over-limit equipment is permitted. This allows for immediate tax relief, and makes leasing equipment and investing in a practice a more feasible option. This law offers an accelerated way for veterinarians to take tax deductions on capital purchases rather than depreciating a piece of equipment over the course of several years.
“We have provided more than 200 business loans to veterinarians and advise them to work closely with a CPA to get the maximum deduction available under ever-changing tax laws,” says Mark Edwards, president of Atlanta based BB&T Bank’s SBA Group. “The best advice is to document all expenses and rely on a trustworthy CPA.”
Tom McFerson, CPA, ABV, Gatto McFerson CPAs, says this year’s economic stimulus incentive is by far the largest amount.
“Few practices will be able to take full advantage of these incentives,” McFerson says. “I’d advise any veterinarian to purchase needed equipment this year, since it likely won’t be as high again.”
CPAs say not to overlook deductions that may seem minimal, as the small deductions can make a significant difference in taxes.
“The standard mileage rate for 2008 increased July 1 to 58.5 cents per mile,” says Jim Mahan, director of marketing, Live Oak Bank in Wilmington, N.C. “This relates to personal automobile used for business purposes. Vehicles owned by the practice, insurance, repairs and fuel may be deducted as long as receipts are documented.”
Live Oak Bank specializes in loans to veterinarians and is operated by a team with more than 20 years of experience in the veterinary industry. The commercial bank gives financial planning advice and lending options nationally.
“Mileage expenses are a big area the IRS closely monitors,” says Lee Goodyear, EA, in-charge accountant and an IRS enrolled agent for Owen E. McCafferty, CPA, Inc. “Make sure to keep detailed mileage logs and receipts for all monies claimed under this deduction.”
Veterinarians may pay CPAs by the hour, yearly or per form if utilizing services only for filling out tax forms. Rates vary, depending on the veterinarians’ needs and region.
“CPAs know what items are tax deductible for a practice but aren’t able to be deducted on personal tax forms,” Amernick says. “When veterinarians are performing their job, they often aren’t thinking about tax implications, which are why a CPA is such a benefit.”