Last-Minute Tax Tips For ODs
I recently spoke with J. R. Armstrong, CPA for some ideas on last-minute tips to help you lower the tax bill you will pay in April 2009 for income earned in 2008. His firm, May & Company, LLP, in Vicksburg, MS does tax work for over 100 ODs in 29 states. Here is what he had to say:
• Harvest capital losses on stocks that are down — most everyone’s portfolio has some losers; consider selling securities at a loss and reinvesting in securities that are similar. You can offset capital gains with those losses and, in addition, can offset up to $3,000 of ordinary income with capital losses
• Prepay all the business expenses you can before December 31, 2008. This could include frames, lenses and contacts you have already dispensed (not unsold inventory), interest expense for business loans, tax and accounting fees you have already incurred, or business insurance premiums coming due soon.
• Pre-purchase supplies that you will need in the first part of 2009.
The basic concept is that if you’re in a marginal tax bracket of 40% (I’m rounding off), every $1,000 of business related expenses you pay before December 31, 2008 will reduce your April 2009 tax bill by $400.
But, if you wait three days until you go back to the office on January 2 to make that same payment, you won’t be able to deduct that expense until you pay taxes in the spring of 2010.
For example, let’s say you’re expecting to report $150,000 in practice profits for 2008 after all expenses have been accounted for.
If you accelerate the payment on an additional $10,000 in lab and frame bills to December 31 instead of your normal payment date of January 10, 2009, you’ll reduce your reported income by $10,000 and your April 2009 tax bill by $4,000 ($10,000 x 40%).
Of course, prepaying business expenses won’t actually save you money. It just delays your tax payments by one year. Plus, your tax calculation will change in 2009 if you make less due to the recession or the tax laws change.
But, if you have the ability to pay December invoices in late December instead of early January, it’s a great way to defer paying thousands on your tax bill.
The big reason most ODs won’t utilize this technique, of course, is that prepaying $10,000 in supply bills might crimp your cash flow.
Let’s look at that disadvantage from a strictly financial standpoint and assume you didn't have the extra cash and needed to borrow $10,000 from your bank for 30 days at 8% simple interest to prepay some bills.
The interest on that loan would be less than $68 ($10,000 x 8% ÷ 12 months = $67.67 in interest). Be sure to ask your bank if there are any other fees.
So, assuming you borrow $10,000 to pay your bills early and you pay it back within 30 days, this technique will give you the use of $4,000 of your own money for another 12 months for only $68.
Since CD and savings rates are very low right now, you’ll have to decide for yourself what the value of having an extra $4,000 in your bank account for one year is worth to you. Maybe it wouldn't be worth the trouble in good times.
However, if your practice revenues for Q4 2008 and Q1 2009 decline because of the recession, prepaying select bills in December that you might otherwise hold until January can be a meaningful way to conserve cash in tight times.
Caveat: Be sure to consult your own tax professional for advice on how this ‘prepay’ technique might affect your individual situation.
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2008 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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Dr. Hayes, I recently opened
Dr. Hayes, I recently opened up a practice cold in Charlotte, NC (www.clearvieweye.com) with my brother (he is also an O.D.). We have been members of Red Tray now for about six months. I really enjoy this blog and Red Tray's advantages. Furthermore, I look forward to other insights you will share with us.
Thanks Ben! We look forward
Thanks Ben! We look forward to serving your practice.