If you're like many busy professionals in practice, you don't pay much attention to income taxes until the filing deadline looms.
"That can be a costly mistake," said Tom Normoyle, a certified public accountant (CPA) from Huntingdon Valley, PA. "One of the most effective ways to pare your taxes to the legal minimum is to make tax planning a year-long effort."
It's only natural for you to devote most of your practice management time to developing income and reducing expenses to enhance your bottom line. However, it's important to remember the effect that taxes have on those before-tax dollars.
Here are some easy tax-planning tips that will help you to maximize your after-tax dollars in 2007 and beyond.
1. Organize your records now
Organizing your records early in the year is an effective way to help reduce your tax load. "If you scramble at tax time looking for receipts and other records to pass along to your accountant, you're probably missing out on some healthy deductions," said Normoyle.
Start out early this coming year by setting up folders for expense and income records and file them as they accumulate. By keeping your computer input complete and up-to-date, you'll make your accountant's job easier next April. An easier job for your accountant means a savings on your tax preparation bill as well as your taxes.
2. Look for deductions that you may have missed last year
"Many taxpayers miss out on important deductions by waiting until the last minute," said CPA Paul Rich, New York, NY. "Among easy-to-overlook tax benefits are deductions for travel, meals, and entertainment." Many professionals do not keep adequate documentation for these expenses. As a result, they lose out on deductions that could provide significant tax relief.
3. Purchases financed by loans or credit cards
If you plan to make any large purchases on your credit card or with a loan, don't forget to deduct any interest costs involved.
Use caution when taking advantage of this or any miscellaneous deductions. Document everything. If the Internal Revenue Service (IRS) decides to question you about any of your deductions, they will want to see all of your pertinent receipts and statements.
4. Take advantage of Section 179
Most new business equipment can either be depreciated over its useful life or expensed immediately under the IRS Code, Section 179. This provision of the tax law allows you to deduct the full cost of capital assets in the year of purchase up to a maximum of $108,000 for 2007. Consider making any big capital expenditures you've been planning before year-end in order to lower this year's tax bill. Purchases made right up to December 31 will be eligible for the Section 179 tax deduction this year.
5. Combine pleasure trips with some business
If you're planning any pleasure trips this year, consider adding in a little business. Can you visit a physician or professional organization in your destination city to discuss business techniques that may help to improve your practice management?
When you travel away from home, you may deduct fares, meals, lodging, and incidental expenses (as long as they are not extravagant). The definition of "away from home" is any trip that takes enough time that the traveler could reasonably be expected to need sleep or rest. The definition of home is your regular place of business. As long as the primary purpose of the trip was business, you can deduct these travel expenses even if you enjoyed some non-business extracurricular activities.
Keep in mind that if more than 50% of the time you spend away from home is spent on pleasure, the cost of transportation will be disallowed. However, if more than 50% of your time is devoted to business, all travel expenses will be deductible.
6. Maximize your tax-deferred retirement account early
Make the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible. Financial experts universally regard this as one of the most important tax-savings techniques.