Tax Tips for Physicians: The Best Tax Strategies for Your Practice

As you launch your independent practice, there are a number of financial and legal considerations to keep in mind. A growing business will probably mean a higher income for yourself and, along with that, certain tax related responsibilities. Check out these tax strategies for your new independent practice that will help you plan more appropriately.

The first step in establishing an independent practice is ensuring you have selected the proper legal entity. The type of entity will determine how your profits will be taxed as well as your personal liability. To determine the right structure for your organization, answer a few questions such as:

• How much revenue will your practice generate during a year’s time?

• Do you have employees?

• Do you need to protect any practice assets or yourself?

• Where is your practice located?

• What are your costs and managerial responsibilities?

• Do you need more permanence or transferability?

Options for a business entity for your new independent practice are:

Sole Proprietorship. Typically, this is the simplest and easiest structure to set up and maintain. As a sole proprietor, you pay income tax and self-employment tax on all of the profits from your business. You are also individually responsible for all of your Social Security and Medicare taxes, which amount to 15.3% of your gross pay. Although it may be easy to maintain, it also creates an unlimited individual risk for you as the independent practice owner.

Partnership. If your practice has more than one owner, this pass-through entity may be an option for you. It is referred to as a “pass through” because the income and losses of the practice pass through the legal entity and into your personal tax return. All of the profits are passed to you and your partner(s) and are then taxed at the ordinary rate that is subject to self-employment taxes. You may still face liability issues as a partnership.

S-Corporation. This is also a pass-through entity. However, with an S-corporation, you are taxed differently as an individual business owner. You will be required to take a reasonable salary but then any profit above that salary is seen as a distribution and is not subject to the usual Social Security and Medicare taxes. S-corporations can be more challenging to set up and maintain.

C-Corporation. A standalone entity that protects you and your practice from general business liabilities. Note that you will still require malpractice insurance even as a C-corporation. If you have outside investors for your practice, this may be the better option for you. All profits are taxed at the entity level and you will take a salary from the business, on which you will be taxed.

Other effective tax strategies for your independent practice can include:

• Retirement plan contributions: Usually the easiest and most direct way to lower your taxes, you will receive a deduction for the contributions to your retirement plan. You will play less in taxes because your taxable income will be lower after you make the contributions. There are limits to how much and when you can contribute.

• Hiring family: You can shift income from your higher tax bracket into family members’ lower tax bracket while creating a deduction on your practice’s income of the individuals’ wages. For sole proprietorships and partnerships, you do not have to pay Social Security or Medicare taxes on children’s payroll. You will have to take care of those payroll taxes as an S-corporation or C-corporation, though. If you hire a family member, it must be viewed as legitimate, with an actual job and job title, with documented responsibilities, and a reasonable wage.

• Cost segregation studies: If you own the building where your practice is located, you might be able to investigate the possibility of breaking down the structure into various depreciable components with shorter depreciable lives. In this way, you can accelerate depreciation instead of depreciating the entire building over a 40-year period. These studies are more complex but may lead to new tax saving strategies.

As with all tax-related strategies, it’s best to consult a tax or financial advisor for help with understanding the limits, tax benefits, and whether these approaches are appropriate for you and your practice.