Year-End Tax Considerations for Vet Practices: Part 2
By Regina Rennhack, Whitley Penn Tax Senior Manager. Article originally published by Patterson Veterinary on October 03, 2024
Missed Part 1 of this series? Read it here!
With taxes as with other things, an old adage holds true: the early bird really does get the worm. In part one of my article on end-of-year veterinary tax planning, I talked about depreciation strategies to consider in the last quarter of the year. However, although depreciation strategies can steal the spotlight of small business tax planning, there’s more to consider. Below are a few other things I talk about with my clients as they close out the fourth quarter of the year.
It’s important for practice owners to give careful thought to how they work with equipment purchases, or any other purchase-based deductions. For example, if they operate their business as a pass-through entity (partnership or S corporation), they should keep in mind that there are circumstances where depreciation-related losses can create basis issues, potentially resulting in additional tax owed due to distributions in excess of basis. This is a situation where it might make more sense to spread the deduction over future years and avoid basis issues and additional tax.
Year-end planning should also consider future tax brackets so practices don’t waste an important deduction in a lower tax bracket when it’s clear that it will be in a higher bracket in future years. This kind of planning can result in greater overall tax savings.
A hypothetical example illuminates my point. Consider a practice that has determined a new digital radiography system will improve their efficiency and increase revenue. In this case, they may decide to purchase the new system for $50,000 and expect to write off the full amount. However, when they review year-end profit with their accountant, they realize they don’t need the full $50,000 this year and it’s better to preserve some of those deductions for the future.
Keeping in mind that bonus depreciation is an all-or-nothing choice, one alternative would be to elect out of bonus depreciation and take Section 179 for a portion of the purchase. They would then spread the remaining balance over five years. This choice preserves a portion of those deductions for future years when you expect to be in a higher tax bracket.
Tax credits are dollars in a practice’s pocket, and the Secure Act 2.0, which went into effect after December 31, 2022, can help. This updated tax law is designed to improve retirement savings by providing tax credits and other incentives to individuals and businesses. One provision is geared toward employers with fewer than 100 employees to start a new retirement plan and get employee participation.
For retirement plan startup costs, tax credits of up to $5,000 for three years are available. For employer plan contributions, tax credits of up to $1,000 per employee for the first five years are available.
Another new provision under the Secure Act 2.0 begins in 2024 and allows employers to contribute to retirement accounts for employees who are paying student loan payments. Specifically, employers can make matching contributions to a retirement plan when employees make qualified student loan payments. These tax incentive opportunities may extend beyond just tax savings as they can increase the ability to attract new employees because of the benefits your business offers and provide greater employee retention.
This deduction became available in 2018 for pass-through entities. It allows for a 20% deduction on qualified business income for business owners below a taxable income threshold. While the QBI deduction is a much more involved discussion than space allows, bonus and Section 179 depreciation may be one option to bring the taxable income below the QBI threshold, generating additional deductions not previously available due the owner’s income phaseout.
Practices using the cash method of accounting need to consider paying down their accounts payable (not loan payments or credit card balances) as much as possible before December 31. If they aren’t sure whether they are on the cash method or not, they should ask their accountant. Keep in mind that paying accounts payable bills by charging them on a credit card has the same tax effect as paying them with cash, so don’t overlook the opportunity to move the deduction into this year by paying with a credit card.
When thinking of paying down accounts payable, it’s advisable to focus on operating expenses and cost of goods sold. For example, paying a property tax bill would decrease net income for the year, but paying a credit card balance due won’t affect income because a practice has already expensed the amounts charged to the card. Alternately, practices that are on the accrual method of accounting should be sure to have recorded all vendor bills prior to the end of the year. They should also carefully consider accounts receivable for write-offs of bad debt.
It’s important for practice owners to give careful thought to how they work with equipment purchases, or any other purchase-based deductions. For example, if they operate their business as a pass-through entity (partnership or S corporation), they should keep in mind that there are circumstances where depreciation-related losses can create basis issues, potentially resulting in additional tax owed due to distributions in excess of basis. This is a situation where it might make more sense to spread the deduction over future years and avoid basis issues and additional tax.
Year-end planning should also consider future tax brackets so practices don’t waste an important deduction in a lower tax bracket when it’s clear that it will be in a higher bracket in future years. This kind of planning can result in greater overall tax savings.
A hypothetical example illuminates my point. Consider a practice that has determined a new digital radiography system will improve their efficiency and increase revenue. In this case, they may decide to purchase the new system for $50,000 and expect to write off the full amount. However, when they review year-end profit with their accountant, they realize they don’t need the full $50,000 this year and it’s better to preserve some of those deductions for the future.
Keeping in mind that bonus depreciation is an all-or-nothing choice, one alternative would be to elect out of bonus depreciation and take Section 179 for a portion of the purchase. They would then spread the remaining balance over five years. This choice preserves a portion of those deductions for future years when you expect to be in a higher tax bracket.
Tax credits are dollars in a practice’s pocket, and the Secure Act 2.0, which went into effect after December 31, 2022, can help. This updated tax law is designed to improve retirement savings by providing tax credits and other incentives to individuals and businesses. One provision is geared toward employers with fewer than 100 employees to start a new retirement plan and get employee participation.
For retirement plan startup costs, tax credits of up to $5,000 for three years are available. For employer plan contributions, tax credits of up to $1,000 per employee for the first five years are available.
Another new provision under the Secure Act 2.0 begins in 2024 and allows employers to contribute to retirement accounts for employees who are paying student loan payments. Specifically, employers can make matching contributions to a retirement plan when employees make qualified student loan payments. These tax incentive opportunities may extend beyond just tax savings as they can increase the ability to attract new employees because of the benefits your business offers and provide greater employee retention.
This deduction became available in 2018 for pass-through entities. It allows for a 20% deduction on qualified business income for business owners below a taxable income threshold. While the QBI deduction is a much more involved discussion than space allows, bonus and Section 179 depreciation may be one option to bring the taxable income below the QBI threshold, generating additional deductions not previously available due the owner’s income phaseout.
Practices using the cash method of accounting need to consider paying down their accounts payable (not loan payments or credit card balances) as much as possible before December 31. If they aren’t sure whether they are on the cash method or not, they should ask their accountant. Keep in mind that paying accounts payable bills by charging them on a credit card has the same tax effect as paying them with cash, so don’t overlook the opportunity to move the deduction into this year by paying with a credit card.
When thinking of paying down accounts payable, it’s advisable to focus on operating expenses and cost of goods sold. For example, paying a property tax bill would decrease net income for the year, but paying a credit card balance due won’t affect income because a practice has already expensed the amounts charged to the card. Alternately, practices that are on the accrual method of accounting should be sure to have recorded all vendor bills prior to the end of the year. They should also carefully consider accounts receivable for write-offs of bad debt.
Final Thoughts
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Regina Rennhack
Tax Senior Manager
Regina has more than 27 years of tax experience. She advises clients on federal and state tax compliance, tax planning, and bookkeeping consulting, and is experienced in individual, partnerships, Subchapter S Corporations, C Corporations, fiduciary and estate tax.