Ask CPA Sandy Blockman what advice he has for physicians as they consider their 2015 business taxes, and he'll tell you that the best advantages now hinge on action by Congress. In other words, they're unpredictable at best.
“It's a guessing game at this point,” said Blockman, a partner at Watkins Uiberall who's been practicing for 35 years and estimates that medical providers comprise about 20 percent of his client base.
“At the end of every year, it seems that taxpayers wait anxiously for Congress to enact extensions of popular business tax breaks that are set to expire,” Blockman said. “And what happens is that every year Congress waits to act until what seems to be the last possible moment.”
Last year, lawmakers approved the extensions in December. “They extended probably a few dozen provisions retroactively,” Blockman said, “and the year before that, at the end of 2013, they didn't act until January (2014) to extend the provisions that were going to expire at the end of 2013.”
The Wall Street Journal reported in August that a survey of 912 chief financial officers and comptrollers by the auditing firm Grant Thornton found that more than half of companies that use tax credits were assuming for budget purposes that Congress wouldn't extend the provisions. At the time, only 9 percent of the CFOs said they felt confident the tax breaks would pass.
“So we're dealing with a very dysfunctional Washington,” Blockman said. “As we stand right now, the currently expired business tax breaks include what everyone loved, which was the bonus first-year depreciation,” as well as the provision called Section 179, which allows taxpayers to claim some property as business expenses that would otherwise have to be considered capital expenditures.
The deductions for new equipment in the year of purchase make it unnecessary to depreciate them over time.
“Doctors who are buying new diagnostic equipment or other medical equipment, even furniture for the office, those again now have to be depreciated over typically five or seven years, where previously it could have been written off very rapidly, or bonus depreciation would have allowed them to write off a very large percentage in one fell swoop,” Blockman said.
With expiration of the bonus depreciation and Section 179 deduction limits, companies can claim only $25,000 in first-year depreciation on equipment that costs up to $200,000. Blockman said the deduction had been as high as $500,000 on purchases up to $2 million.
Many of the most liberal business tax provisions were a response to the financial downturn of 2007 and 2008.
“They just kind of opened the floodgates and said we want people to start spending money. Let's give them the ability to do so by giving some tremendous tax advantages,” Blockman said. “Everybody's gotten addicted to this largesse, and so Congress keeps reinstating it.”
However, he said, the unpredictable and retroactive extensions by Congress don't encourage business spending in the way the tax provisions were intended.
“If I buy $100,000 worth of equipment, and I'm going to save potentially 40 percent of that, or $40,000, in income tax, my after-tax cost is only $60,000,” Blockman said. "If I know that when I'm buying it, that might encourage me to buy it. But if I'm buying the equipment in January, and I don't know that, then restoring it to me and letting me write it off at the end of the year – I love it, but that didn't really encourage me back in January to buy it or not to buy it.”
Another popular provision that has expired, and may or may not be extended, is the research and development tax credit.
“There are a number of physicians in the Memphis area and across the country who are involved in research and commercial applications of that research, who have taken advantage of this,” he said. “Any particular physician specialty, be it orthopedics, gastroenterology or cardiology, if they are coming up with new surgical procedures or new devices to be used in surgical applications, the monies that are being spent to develop those technologies and those products have qualified for the R&D credit in the past. . . . Whether it will become available retroactively, your guess is as good as mine.”
Blockman says a useful strategy to reduce taxes in 2015 is to delay income to 2016. “The very simple technique is just to delay receipt of money, so don't invoice patients at the end of the year. That's not a very common ploy any longer (for physicians' offices) because most patients are coming in with insurance, and you can't really control when those monies come in.”
In addition, businesses on the cash method of accounting should pay as many bills as possible before the end of the year.
“Identify money that can be spent on deductible expenses. Say you have to repair some equipment, do it now. Don't wait until January 2016. If you're paying bonuses, pay them before the end of the year. There's nothing exotic about that strategy, but it still works,” Blockman said.
He said medical groups also should determine whether they qualify for the tax credit to help small employers pay for employees' health insurance premiums. An employer with 25 or fewer full-time equivalents, and a salary average of less than $50,000, can qualify.
‘The sweet spot is essentially less than $25,000 in average wages, and less than 10 people working for you,” Blockman said. “That's a 50 percent credit of the amount of insurance premiums, but there is a steep phase-out, so you'll start losing the advantage of the credit once your average wages increase between $25,000 and $50,000 and you have more than 10 full-time equivalent employees.”
Because of the unstable political climate, “We're working with clients now with the law as it is, not as we would like it to be,” Blockman said.
“Back in July, the Senate finance committee came up with a bill of the usual extenders. The House of Representatives wants to make some of these provisions permanent, and they didn't act on it. So something's likely going to happen. Can they get something done before the end of the year? History shows that they have. But they say in the investment business, past performance is not an indication of what the future is gonna bring, and I guess you could say the same thing about Congress.”