Year-End Tax Moves to Boost Your Practice’s Health

The April 15th tax deadline might be months away, but that doesn’t mean you can’t get started. There’s a wide range of moves you can make now — digging up tax deductions, strategically timing large purchases, reducing your taxable income to put you in a lower tax bracket, and so much more — to make the most of your refund or minimize your tax due.

Of course, we can’t avoid paying taxes entirely. That said, careful tax planning at the end of the year could reduce your tax bill and benefit you and your healthcare practice.

So don’t wait for the tax filing deadline! Here are some year-end tax strategies you and your tax advisor should consider now that can pay off at filing time.

Buy large equipment to take advantage of expensing and depreciation.

Medical machinery, software and more can be expensed through Section 179 and bonus depreciation. This popular tax deduction strategy allows you to deduct a large portion of the cost up front instead of depreciating it over a period of many years.

For the 2024 tax year, you can deduct 60% of the amount of these qualified tax deductible purchases with bonus depreciation. While this is a sizeable chunk, it’s the second in a series of reductions. Bonus depreciation was introduced in the Tax Cuts and Jobs Act (TCJA) of 2017, at which time it was a 100% deduction. However, the TCJA specified an annual reduction of 20 percentage points per year beginning with 2023. After the 2026 tax year, bonus depreciation won’t be available at all.

So if you’re thinking about a new MRI machine, a patient transport van, billing software or even an office building (certain elements may qualify for bonus depreciation), purchase them now while the rate is still 60%.

Just remember that to leverage this year-end tax move, the equipment has to be not only purchased but also placed in service by Dec. 31, 2024. While that might feel rushed, waiting until next year can cost you thousands of dollars in deductions.

Minimize your income and self-employment tax obligation.

It’s simple: Being in a higher tax bracket means you’ll pay taxes at a higher rate. And if you own your practice as a sole proprietorship or partnership, you may have self-employment tax in addition to your regular income tax. That’s an additional 15.3% levied on the money you earn, and it really adds up.

You can minimize how much is collected for both tax types by reducing your taxable income. The quickest way to do this is with business deductions — a popular year-end tax move to lower your adjusted gross income.

While work-related car mileage and business meals are the more commonly known tax deductible items, you might not be aware of others.

For example, you can often deduct:

• Home internet fees if you use your network for work purposes (like updating patient files)
• Cellphone fees if you use your phone for patient calls or other practice business
• Conference and CME fees (along with the travel and meals purchased while attending them, if the sessions are in person)
• Professional association dues
• Your own healthcare insurance premiums

Take a good look at your expenses. Any you can solidly connect to your business operations is a possible way to lower your tax liability. You can also delay billing and receipt of revenue if you are on the cash accounting basis.

And don’t forget other, non-business deductions on your personal return. These include interest on student loan payments, health savings account contributions, and pre-tax contributions made to retirement accounts like a traditional IRA or a 401 K (but not a Roth IRA since those are post-tax contributions). All of these and more (including charitable contributions – see below) are valid deductions that can reduce your tax liability.

Leverage charitable contributions.

While making a charitable contribution is done primarily for the greater good, we can’t overlook the tax benefits it can also provide. These contributions are deductible at up to 60% of your adjusted gross income.

There are several types of charitable deductions.

Donating Appreciated Assets

Instead of cash, you can donate appreciated assets like stocks or real estate to a qualified charity. Doing this not only provides a tax deduction for the fair market value of the asset, it also helps you avoid paying capital gains tax on the appreciated value.

Donor-Advised Fund (DAF)

Contributing to a donor-advised fund allows you to take an immediate tax deduction while distributing the funds to charities over time. This strategy can be particularly useful in high-income years, allowing you to front-load contributions and maximize deductions.

Charitable Remainder Trust (CRT)

By placing assets into a CRT, you can receive an immediate tax deduction, reduce taxable income by spreading income over time and potentially avoid capital gains tax. The trust eventually benefits a charity after you or your beneficiaries receives income for a specified period.

Qualified Charitable Distribution (QCD)

If you’re aged 70½ or older, a qualified charitable distribution allows for direct transfers from an IRA to a qualified charity. These distributions can satisfy required minimum distributions (RMDs) and exclude the transferred amount from taxable income. Qualified charitable distributions can be particularly advantageous if you’re looking to reduce taxable income without itemizing deductions.

Bunching Charitable Contributions

This strategy involves “bunching” or consolidating charitable donations into a single tax year to exceed the standard deduction, allowing you to itemize and receive a greater tax benefit. This approach is especially effective in years with high income or large charitable intentions.

Private Family Foundation

If you have significant philanthropic goals, establishing a private foundation can provide ongoing savings on your yearly tax bill. Contributions to the foundation are tax deductible, and you can retain control over how the funds are used for charitable purposes.

Matching Contributions

Some physicians can also leverage employer matching programs, effectively doubling the impact of donations and maximizing tax deductions.

Make a late entity selection.

If your practice is an LLC or corporation, making the election to treat your business as an S corporation can quickly reduce your taxable income. This is because S corporations allow you to take part of your income as a distribution instead of a salary. Distributions aren’t subject to Social Security and Medicare taxes (or self-employment tax) possibly saving you tens of thousands of dollars per year.

You can change your business structure pretty quickly to take advantage of this year-end tax move. However, we generally only recommend it if your income hits at least $100,000 and is expected to stay there or higher.

Once your practice becomes an S corporation, you can elect out of S corporation treatment in the future as needed. However, if you do, you can’t file an S corporation election for the next five years. Also note that S corporations bring their own costs and complications (for example, the requirement of a separate business tax return and payroll).

Take advantage of the Augusta Rule.

Do you rent space on your property for overnight guests during home football game weekends or other local events? The rent you collect does not fall under taxable income as long as you don’t exceed 14 rental days during the year!

It’s a loophole called the Augusta Rule. The stipulation was named for a group of Augusta, Georgia residents who rented their homes out to visitors attending The Masters golf tournament. This practice had been a long-standing tradition; area residents would leave town for the week as visitors occupied their houses.

But the Internal Revenue Service took notice, and income tax liability followed. So in the 1970s, the residents lobbied the IRS to let them provide short-term rentals without having to become a rental business.

The result is Section 280A in the tax code, AKA the Augusta Rule. There are no requirements for the rental space itself. It can be a single room or your whole house, and it doesn’t even need a separate entrance. You just have to keep the total yearly rental time at 14 days or under. This makes it a perfect year-end tax move; apply it to past rentals, or make your property available for local stays before December 31.

By the way, you can also apply the Augusta Rule when renting your home to your business for work purposes. For example, let’s say you want to host an all-day retreat or planning session for your staff. You can host the event at your home to earn non-taxable income. Just find out the cost for the event if it were held at a local hotel or conference center. Your practice would then write a check to you for that amount.

One word of caution: The 14-day threshold is retroactive if crossed. If you exceed it by even one day, the income from all rental days during that year becomes taxable income. So track your rental times and rates carefully to avoid being taxed.

Selling your practice? Save on capital gains taxes.

If you’re moving on to retirement or other endeavors, selling your practice can bring you a significant financial windfall. Of course, that also means dealing with capital gains taxes. There are several strategies you can consider to help reduce that obligation.

Installment Sale

Spreading the sale proceeds over several years through an installment sale lowers your taxable income — which in turn keeps you in a lower tax bracket.

Opportunity Zone Investment

Reinvesting the gains into a Qualified Opportunity Fund allows you to defer taxes on capital gains and potentially reduce the taxable amount. This depends in part on how long the investment is held.

Charitable Remainder Trust (CRT)

You can transfer the practice into a CRT, which then sells the practice. This can provide an immediate tax deduction and defer capital gains tax while providing income over time.

1031 Exchange (if applicable)

If you’re selling your practice and part of that sale includes real estate, a 1031 exchange allows the deferring of taxes by reinvesting in another like-kind property.

Maximizing Deductions and Offsetting Gains

Using deductions such as depreciation recapture, along with any capital losses, can help offset gains from the sale, reducing the overall taxable amount.

Personal Residence Exclusion

If your practice is physically connected to your personal residence, a portion of the gain might qualify for the home sale capital gains exclusion.

Selling your practice is a long and involved process. So if you haven’t started that yet, reducing taxes on capital gains isn’t going to help you this year. But keep the thought in mind for future returns as you approach this milestone and consider your exit strategy.

Look at your revenue cycle.

True, it’s not technically a year-end tax strategy. But examining your revenue cycle helps you find “hidden” money while wrapping up your operations for the year. It can also help you recover money you might’ve missed otherwise.

For example, examine your outstanding receivables. Make sure everything possible is coded, billed and collected by the end of the year. You can also follow up on rejected claims to see if they can be fixed and resubmitted before the time period expires. Practices often neglect this aspect of their revenue cycle. But it could send a lot of money left on the table straight to your bottom line.

Find a tax advisor who knows the healthcare industry.

When looking into potential tax savings, you’re best served by hiring a healthcare CPA. They’re well versed not only in tax laws and standard deductions and strategies, but in the challenges and business operations particular to physician practices as well.

A qualified healthcare tax advisor understands the deductions and tax issues within the medical field, allowing them to provide targeted advice that a general tax advisor might miss. The right expertise is crucial in your tax planning efforts, so be sure to ask for it when selecting a firm.

These are just some of the ways you can lower your taxable income, take advantage of deductions and realize more after-tax dollars. Check with your healthcare tax advisor for more tax planning information and additional year-end tax strategies you can leverage.

 

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