The biggest advantage of using sole proprietorship as a business entity is its simplicity. Still, a taxpayer can easily over-pay taxes if all available deductions aren’t taken. Medical professionals are a good example of business owners that need to pay special attention to the Schedule C IRS Form in order to prevent their sole proprietor businesses from making costly tax errors.
Capture All Business Activity
Schedule C provides 25 separate categories for deductions which can be used to offset income from the business. One of the most common oversights by sole proprietors is failure to claim all business expenses as deductions. Physicians are as susceptible to this pitfall as any other type of business owner. Among the types of expenses physicians frequently fail to deduct are travel, license fees, dues, subscriptions, and continuing education costs.
Fortunately, this mistake is easy to avoid with a sound bookkeeping system that captures all business activity. Establishing separate checking, credit and debit card accounts for the business is an important first step. It’s much easier to accurately and completely capture deductions from a complete dataset than to pick through combined business and personal purchases (sometimes months after you’ve incurred them) to figure out what should be included on the Schedule C.
Our clients often find QuickBooks an indispensable tool for their bookkeeping, accounting, and payroll activities. QuickBooks has accounting packages available that have been especially customized for healthcare professionals. Whether you use QuickBooks or some other tool for capturing business transactions, the key is to keep everything in one place.
Once capturing all the business-related transactions is accomplished, there are several types of costs that require further analysis to determine what amounts can be deducted.
Equipment purchases. Equipment purchases must be reported on a separate tax form and evaluated for complete deduction in the year of purchase, or depreciated over a period of time. The deduction applies to most business property, including software and medical tools. Capturing these investments is worth the effort, as a substantial portion of the costs is often available for deduction.
Home office deduction. Sole proprietors often shy away from taking a home office deduction because of perceptions of audit risk. However, if the business owner is legitimately entitled to the deduction, it can be significant. In order to qualify for the deduction, a home office must be the business’s PRIMARY office AND used exclusively for business purposes, and nothing else. This could be a dedicated room, or even part of a room that’s used just for the business.
Tax deferred retirement. There are several options available for physicians who operate as sole proprietorships to deduct at least a portion of the contributions as business expenses and for those contributions to grow, tax-deferred, until they are withdrawn for retirement. Choosing the right plan is beyond the scope of this blog post, and takes careful thought and consideration. The key point here is to be aware of the options and to make the most of them in financial planning.
Charitable contributions. Deductible charitable donations aren’t limited to cash contributions, and helpful physicians often fail to capture the full benefit from their benevolent activities. For example, a doctor donating a piece of used medical equipment can deduct its fair market value. And while taxpayers cannot deduct the value of their donated time, they may deduct the costs–such as automobile mileage, medical supplies, etc.–of providing those volunteer service hours.
As a sole proprietor, charitable donations are reported on Schedule A as personal expenses, not on Schedule C as business expenses. However, amounts paid to a service for charity, such as advertising at an awards program, are Schedule C business expenses, not Schedule A charitable contributions. This distinction is important because Schedule A only comes into play when the taxpayer itemizes deductions, whereas business expenses on Schedule C are deductible from the first dollar. There are also limits on the dollar value of charitable contributions that do not apply to business expenses.
Schedule a Consultation
At 212 Tax & Accounting Services, we provide professional accounting and tax preparation services to businesses and individuals in Manhattan and the New York City metropolitan area. Our business clients span several different industries, including medical professionals. Schedule a consultation with one of our professionals today to find out how we can help you establish a sound business and financial infrastructure, maximize tax deductions, avoid surprises, and keep more of what you earn.