In the last few months of 2019, it is advisable that business owners speak to an accountant regarding profit and loss data, eligible deductions, tax strategy and ownership structure both to prepare for tax season and to ensure a solid foundation on which to build the next fiscal year. This includes optometry practices.
Here are a few of the most common deductions for optometrists and the best practices for each.
1 OFFICE SUPPLIES AND EXPENSES
If the supplies purchased are used within the year and the O.D. maintains a record of all receipts, she can deduct conventional business supplies and office expenses, such as pens, paper, printer supplies, etc. The best way to maintain this record is by numerically assigning an account designation to each receipt or by immediately reconciling the expenses through the use of an accounting software (such as Quickbooks). Refer to IRS Publication 535 for more detail.
2 SPECIFIC PROPERTY
Section 179 permits taxpayers to deduct the cost of specific property, such as machinery and equipment, as an expense when the property is purchased and placed in service, rather than depreciating the property over its useful life. Optometrists have options as they relate to this deduction. For example, if the O.D. has purchased chairs for the waiting room, she has a choice to either deduct the cost in the year of purchase or depreciate the cost over a seven-year period.
Additionally, items such as laptops, tablets and software that cost $2,500 or less per item can be expensed when purchased rather than depreciated overtime. In addition, Section 179 allows new computer software to be fully expensed in the year it is purchased, as long as the software will be used for more than one year and is not customized. Essentially, this means that the software must be purchased “off the shelf.” For example, if you purchase an accounting software to help maintain your records, you can expense the total cost of this software in the year it is purchased.
3 ADA TAX CREDITS
Certain equipment purchases may earn the optometrist a credit off the tax bill if a device provides for better access or use for persons who are disabled. In accordance with Section 44 of the IRS Code, businesses with a total revenue of $1 million or less in the last tax year, or businesses that have 30 or less full-time employees are eligible for this credit. The credit covers 50% of the eligible expenses within the year, up to $10,250.
For example, if the O.D. has implemented accessible formats, such as Braille or an audio tape, to educate disabled persons about eye disease, the purchase of these formats are eligible for the ADA tax credit.
4 EMPLOYEE AND CLIENT ENTERTAINMENT
Taken employees out to lunch recently? Held a social or recreational event for employees? If so, the optometrist may be able to deduct up to 50% of the cost of meals purchased for employees and up to 100% of the cost of activities held for employees. The primary purpose of the meal or entertainment must have a business purpose, and it’s best to document the exact purpose of the meal or event in the O.D.’s records to support the reasoning.
For example, on Fridays the optometrist might take employees out to lunch to discuss business matters, such as customer service or the display of new frames. Refer to § 274 of the Internal Revenue Code for addition information.
Deducting airfare, hotels, meals, parking costs, mileage and more to any professional events or trade shows attended this year may be possible. To deduct travel expenses, the trip must be long enough that the O.D. or employee is out of the practice for the length of a normal day’s work, and must get sleep or rest to meet the demands of work while away. Refer to IRS Topic No. 511 for information.
CE credits also may be eligible for deduction, as they are work-related educational expenses. For example, if the optometrist is researching an optometric topic to better her job skills, the cost of research may be eligible for deduction. In addition, if the O.D. has a subscription to a professional publication that improves job-related knowledge, that too may qualify. Refer to IRS Topic No. 513 for more information.
7 MORTGAGE INTEREST
If the optometrist owns the building in which the practice resides, she may be eligible to deduct all mortgage interest expense. In general, one is eligible for this deduction if held legally liable for the mortgage debt; if the O.D. can prove that she intends to repay the debt (proven by showing timely payments) and if the optometrist and the lender have a “true” debtor-creditor relationship (no borrowing of money from a family member). Refer to IRS Publication 936 for additional information.
8 RENT EXPENSES
O.D.s can deduct rental expenses associated with renting equipment utilized at the practice and the building in which the practice resides. Rent expense is defined by the IRS as any amount paid for property that is used in one’s trade or business not owned. If the optometrist has any form of title in the property, rent expense would not be deductible. Refer to IRS Publication 535 for additional information.
O.D. practice owners, undoubtedly, pay for electricity, water and mobile phone services. They should be sure to keep track of these expenses to maximize deductions. Refer to IRS Publication 535 for additional information.
10 BONUS DEPRECIATION
In general, depreciation is spread out over the life of an asset. However, bonus depreciation is a type of accelerated depreciation in which optometrists can deduct 100% for qualified business property. Refer to § 168 of the Internal Revenue Code for additional information. Each year, the bonus depreciation rules change, so it’s important to refer to the IRS Code to stay up to date on what may qualify.
11 WORK OPPORTUNITY CREDIT
O.D.s who have hired an employee who is a military veteran, disabled or from an impoverished family may be eligible for the Work Opportunity Credit. Specifically, this allows for deductions up to $6,000, or the first $6,000 in wages paid. Refer to Section 51 of the Internal Revenue Code for additional information.
END THE YEAR INFORMED
Special tax year opportunities exist! Don’t wait until the end of the fiscal year to learn about ways to invest in yourself and to stay compliant with the IRS. OM