Year-end tax planning for 2014 is particularly challenging because Congress has yet acted on a host of tax breaks that expired at the end of 2013. It is uncertain at this time whether the extender provisions will be extended by Congress on a permanent or temporary basis (and whether any such extension would be made retroactive). These extender provisions may be dealt with as part of a broader tax reform effort, be examined on an individual basis as opposed to as part of the traditionally passed ”extenders package,” or simply allowed to remain expired. These tax breaks include the following:
- An option to deduct state and local sales and use taxes instead of state and local income taxes
- An above-the-line-deduction for qualified higher education expenses
- The use of tax-free IRA distributions for charitable purposes by those age 70-1/2 or older
- The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence
Our doctor clients that are retired may find numbers one and three above to have some impact on their planning, but for most other doctors these individual provisions will have no impact on their personal returns.
- 50% bonus first year depreciation for most new machinery, equipment and software – Expired
- $500,000 annual expensing limitation – Reduced back to $25,000 limit
- Research tax credit – Expired
- 15-year write-off for qualified leasehold improvement property – Expired
Our healthcare business clients may find numbers 1, 2 and 4 to have an impact on their tax planning this year. In the past several years these tax provisions have been extended; however, this year an “extender package” may not be available.
Tax planning towards the end of this year will take on the same time-honored approach of deferring income and accelerating expenses to minimize your 2014 income taxes.
First of all, we will want to keep an eye on the suspended Business tax deductions noted above. If these regulations are reinstated for 2014, taking advantage of the accelerated depreciation or election to expense more than $25,000 of capital purchases will be worth considering.
Effective year-end tax planning should take account of each doctor’s particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. Doctors are often taxed in higher tax brackets – the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds (which are lower than the thresholds at which the phase-out of itemized deductions and personal exemptions begins). So, while many doctors may come out ahead by following the traditional approach (deferring income and accelerating deductions), others, who might be in lower tax brackets or have special circumstances, may benefit from considering accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect.
The following are a few examples of year-end tax strategies and planning to consider:
- If you are operating your business as an S-Corporation, give consideration to maximizing the pass-through income and then distribute the money as a dividend. You should take caution to setting this dividend too high for various reasons, but moving in this direction makes sense today. Dividends received through your S-Corporation will be taxed as ordinary income, but you will save money on payroll taxes and surtaxes that may apply.
- Many doctors experienced losses in their investment portfolios several years ago when they sold out during a down-turn of the market and are carrying over their losses each year due to limits on deducting the overall loss. If your current portfolio has experienced gains, give consideration to selling your investment at a gain that can be off-set with prior year losses that are being carried forward from year to year. If you like the investment, you can always re-purchase, which will then establish a new basis for a sale down the road. Just keep in mind, that you can’t sell and investment at a loss and then repurchase the investment and still take the loss due to what is called “wash-sale” rules.
- Historically, you may have taken the approach of delaying your billing so that you can move income into the next year. While this might make some sense from the tax viewpoint, I’m not in favor of this from a business standpoint – especially, for my healthcare businesses. Working and maintaining your accounts receivable trumps taxes, in my opinion (see 5 Actions Steps for Optimizing Your Collections). Accelerating your expenses at year-end still makes for good tax planning. Take advantage of year-end sales from your clinical and office suppliers. Pay for these supplies and other invoices prior to December 31st. If you expect that your cash flow will improve in January (it often doesn’t, however), you can put the costs on a business credit card. For cash basis taxpayers, an expense charged on a credit card is considered as though you actually paid for the item when you charge it on the card. Keep in mind, that you need to have a business credit card – doctors that put the expense on their personal do not receive a business deduction until the business reimburses the cost to the doctor.
- Over the years of working with doctors, I have seen life-circumstances have impact on my clients and their business. Changes in a doctor’s tax status due, say, to divorce, marriage, or loss of head of household status should be considered. For example, if your 2014 tax filling will be as “Head of Household”, and then the following year will be “Single” it may be wise to accelerate your income into 2014 to take advantage of the “Head of Household” filing. Certain widows or widowers whose spouses died will need to look at the impact of filing a joint return versus filing as a single taxpayer in years following the loss of their spouse. And, reviewing your tax situation in the year you plan to be married is also something to be considered.
- Doctors who are trying to save money for their retirement should give consideration to funding an IRA in coordination with their typical qualified retirement plans that they have at the office. Utilizing this approach to savings allows for options of either deferring the earnings until retirement or potentially converting the IRA to a Roth IRA, which currently holds favorable tax status. For more information on this discussion, see Consider Converting Your Traditional IRA to a Roth IRA.
- Be on the look out for Alternative Minimum Tax (AMT). I find this affecting doctors more today than ever before. While you may not be able to keep it from impacting your tax return, you can try to minimize the effect. If you are subject to AMT, be sure to review the deductions that are causing it to occur in your situation. You may be able to time your expenses from year to year that will help minimize the impact of AMT.
- Finally, being charitable with your money can provide you with tax savings. There are many ways in which you can spread the love to your favorite charity – simply writing a check is one way, but beginning in 2014, again, your itemized deduction may be subjected to a partial phase-out based upon your income. You might consider supporting your charity through your business by advertising with them at a fund-raising function. This would move the deduction from your personal return to your business return, which will ultimately reduce your available income that you would receive from the business and taxed personally. This action would take planning, especially if you are in a group practice. Another option for being charitable is to gift appreciated assets. Recently, I had a doctor gift a rare Civil War document to a museum that he acquired. This will turn out to be a great deduction in his situation.
Attempting to limit your tax exposure takes planning. And, that planning doesn’t occur just when you file your taxes in early 2015 – it happens through-out the year. Doctors that invest their time with their tax advisors during the year will move in the right direction for saving taxes when they ultimately have their tax advisor file their return.
Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™, Enrolled Agent, and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client, contact Mike at www.vmde.com.
The number of patients with high-deductible commercial plans continues to grow. The costs of health insurance premiums are on the rise, which means that employers are likely to eliminate other employee benefits, such as dental benefits.
It’s a fact; your patients have to pay more today for their healthcare than ever before. Since 2006 your patients have experienced an 88% increase in their commercial deductible amounts and since 2002 the percentage of practice receipts that are derived from patient payments have increased – going from just over 10% to more than 30% today. I recently saw a quote in Medical Economics that read, “What you collect from insurance companies covers your overhead. What you collect from patients goes to your bottom line.”
What business priorities must a practice make today to stay on the path of financial health? I recommend that you take action on the following five practice management strategies:
- Focus on the process of patient collections – Create a mapped out plan as it relates to the workflow at the front desk, patient check-in, and the patient checkout process. Your front desk team members are the lynchpin to keeping your collection process rolling. Be sure each staff member, full-time and part-time, is educated on your billing process and clearly understands their role in the process of patient collections.
- Review your systems used for patient collections – Dust off and review your current Financial Policy to ensure that your policies clearly outline your process for billing and collections. Because today’s patients are paying more out-of-pocket, they are becoming more involved in their choices for how they receive their care and from whom they receive it. Your Financial Policy should be crafted in a way to effectively collect your fees and market your services at the same time by conveying a sense of value.
- Offer financial arrangements – I recommend that you have a written Financial Arrangement with your patient. This document would outline the costs of your services, potential discounts, the estimated patient responsibility, and the patient’s agreement to the method of payment. Introducing this document and going over it with your patient during the initial registration of a new patient or during the check-in and checkout of an established patient might be a shift in your business process, but it will assist you in your collection efforts. Studies have shown that only 21% of patient balances not paid up front are ever collected. Having a pre-planned financial arrangement is critical to maintaining a financial healthy practice. You just can’t cut business costs enough to make up for the lost revenue caused by ineffective patient collections.
- Check insurance eligibility and benefits upfront – Determining your patient’s responsibility at the time of service or at the time of scheduling using technology that is readily available today is mission critical. This starts with determining their eligible benefits and then drilling down to estimate their out-of-pocket costs. Taking this step will do a few things for you and your patient. It will assist you in obtaining copays and deductibles upfront. It will eliminate the delay of receiving insurance claim denials, which cause unpaid patient balances, and, it will benefit your patient by removing the anxiety of not knowing what their cost will be. By being proactive in this process you will increase your patient collections and will improve patient satisfaction.
- Establish a payment card on file program – To optimize your collections you should establish a payment card on file program, which will accelerate collections and improve your cash flow. However, keep this important factor in mind – this process should only be implemented using a system that will comply with Payment Card Industry (PCI) regulations and billing standards. I recently met with a doctor who said to me, “Oh, yes, I do this already. My front office staff member is collecting the credit card information and charging the patients’ card each month.” He had no idea that this was a breach of the regulations, as you are not allowed to maintain credit card numbers in your office or on your computers. Establishing an effective payment card program starts with using the right technology and managing your merchant service costs. To view a demonstration that I recorded for physicians and dentists interested in this process click here. The positive results of implementing this in your office include improved collections, improved cash flow, elimination of sending out statements, faster check-in and check-out process, and reduced staffing costs spent on collection efforts.
A doctor’s office must be diligent in their business efforts of billing and collecting outstanding balances from their patients – it’s the difference between having a profitable or unprofitable business. If you would like assistance with reviewing your financial policies, your accounts receivable, or implementing a new collection process in your office, you can request additional information here.
Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™, Enrolled Agent, and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client, contact Mike at www.vmde.com
Back in the early and mid 90’s physician clients considered selling their independent practices to hospitals or merging with larger practice groups. Some individual and small group practitioners were fearful of what effect “managed care” would have on their business and selling out seemed to be the right answer. We helped our clients review contracts, implement incentive payments, and simply helped them retain a good buy-out. Since that time, I have also consulted with many physicians who left employment with a hospital or a larger group practice to establish an independent practice of their own once again. The life of a physician, as it turned out, just wasn’t greener on the other side of the fence. Often, in business, a motivating factor for making a change is the fear of something, which ultimately drives us to make a decision or moves us in a particular direction. Sometimes the motivating factor is simply the fear of the unknown.
Today physicians are faced with more unknowns and complexity. Regulatory compliance, declining and uncertain reimbursement, restrictions on ancillary medical services, the possibility of mandated electronic records are just some ingredients that come to the top of the list during casual conversations. Add to the list the fact that it is becoming more difficult to recruit young physicians to independent practices and then stir in some economic uncertainty and a batch of hospitals looking to retain or build their market share and you have a recipe brewing for a fear caused movement once again.
While this time it may seem different, at the end of the day I believe that we will find many similarities. Reactionary decisions, rather than disciplined strategic planning, will be the cause for a future supply of unsatisfied physicians. If you find yourself asking questions like, should I sell? Or, if you are being approached by a hospital to consider a sale, then I would strongly suggest that you stop, drop and roll.
- Stop – Before you go too far or any further and take some time to step back and reflect on what is important to you. Why are you where you are today? Work through a personal assessment with an independent business consultant or coach. Understand that selling your practice will not solve all your problems. In fact, it just may introduce some new ones.
- Drop – Rid yourself of the notion that you have no choice, but to sell. Today there are many independent physicians and physician groups, both small and large, that are not only surviving, but thriving! Work with a healthcare practice management consultant that can help you identify areas of your practice that needs improvement and increase your profitability. If the end result is to ultimately sell to the hospital, your increased profitability will put you in a better position to receive a higher purchase price.
- Roll – Ultimately you have to come to a decision and be the best you can be as a physician whether working in a hospital environment or as an independent business owner. Don’t let fear drive your decisions. Instead, retain a “you can do it” positive attitude. Assess your personal and business goals regularly. And, become part of the solution to putting out the “Healthcare Reform” fire.
The decisions we make today will have consequences long into the future. So, if you are considering changes to the way in which you work, the longer your viewpoint the better – often the short-term financial consequences that are being presented today are not nearly as good or as bad as what we may think. In his book, Time to Sell?, Randy Bauman quotes an anonymous physician that said, “I always have to remind myself that it’s never as good as it seems on the best days and never as bad as it seems on the worst days. That’s how I keep my perspective.”
To assist you in keeping your perspective and to identify the areas of your practice that may be causing you to consider a change, use the following questions that were adopted from Randy Bauman’s book – Time to Sell?:
(Note that no e-mails or personal information is being requested on the forms. You can simply review the questions or if you choose to submit your answers, I will be using the data to gain additional information and perspectives on what physicians are encountering)
Over the next several months we will be addressing additional issues here with the goal of simply – helping doctors mind their own business!