A veterinary practice owner's tax work is never done. Take a quick look at some of the new provisions to save yourself a few bucks—in fact, a few thousand bucks. These are the biggest changes coming down the pike.
The HIRE (Hiring Incentives to Restore Employment) Act
The HIRE Act provides your practice with a payroll tax holiday for 6.2 percent of FICA tax paid if you hire someone who's unemployed.
You can take advantage of the act by hiring an employee after Feb. 3, 2010, who has not worked more than 40 hours in the past 60 days and who is not replacing a worker who was laid off. Then make sure he or she submits IRS form W-11 to certify the period of unemployment. The payroll considered is paid after March 18, 2010 through December 31, 2010. Finally, you'll need to compute the tax on IRS form 941 beginning with the payroll tax filing quarter that ends June 30, 2010. Bonus: You'll receive a hiring retention credit of up to $1,000 if you employ the worker for at least 52 consecutive weeks.
Here's an example of how it works: Say you hired a previously unemployed worker April 1, 2010. This person earns $18,000 at your practice through May 15, 2011. The practice is entitled to the 6.2 percent tax holiday for wages paid between April 1 and December 31, 2010. In addition, the practice earns the retention credit of $1,000 as of April 1, 2011, for employing the worker for 52 or more consecutive weeks.
The HIRE Act also extends the IRS section 179 deduction for equipment expensing to $250,000 for 2010. If Congress doesn't change that for 2011, it will fall back to $25,000.
The Health Care Act
The focus of Congress's Health Care and Reconciliation Act of 2010 was healthcare, but there are numerous tax changes associated with the new legislation. Unfortunately, the tax changes designed to save you money don't stick around for long.
Veterinary Economics has already covered the basics of the good news: a nonrefundable tax credit for employers to help offset the cost of paying health insurance premiums for participating employees. Click here to read about it. Now for two important tax changes not often covered in the media.
> Qualifying for the tax credit. The credit isn't allowed for health insurance premiums paid for partners, sole proprietors, greater than 2 percent shareholders of an S corporation, or greater than 5 percent shareholders of a C corporation. Ownership also excludes premiums paid for certain family members such as spouses and children of these practice owners.
> Changing W-2s. For 2011, employers will be required to include the value of health insurance on W-2s. While most 2011 W-2s won't be issued until January 2012, W-2s that include the new health insurance information must be available by Feb. 1, 2011, in the event a terminating employee requests his or hers early. This means you need to be prepared to deal with this change in the next few months.
Today, you use IRS 1099 forms for reporting payments of $600 or more made by your practice during a year to a single payee. With certain exceptions, payments to corporations and payments for property or goods aren't reported. That changes on Jan. 1, 2012. New rules will extend reporting requirements to payments made to corporations as well as payments made for goods and property, not just services.
Basically, you'll be providing 1099s to nearly every vendor you work with, including drug suppliers and equipment vendors. Your paperwork will increase, and you should prepare for these changes well before 2012.
2013: The year of paying more
If you earn more than $200,000, get ready to pay more taxes. Here are the highlights (or low points, depending on your perspective):
> Medicare surtaxes. Under current law, the overall Medicare tax rate is 2.9 percent. (That's 1.45 percent paid each by the employer and employee. Self-employed individuals pay both portions.) For wages and self-employed earnings received after 2012, employees will need to pay an additional 0.9 percent Medicare surtax. The new surtax will apply to wages and self-employed earnings exceeding $250,000 for married couples filing jointly, $200,000 for single individuals, and $125,000 for married individuals filing separately.
In addition, a new 3.8 percent Medicare surtax will apply to net investment income of individuals with modified adjusted gross income exceeding the amounts indicated above. Net investment income includes such items as interest, dividends, rents, annuities, royalties, gains from the disposition of property, and passive business income. It doesn't include distributions from qualified retirement plans or capital gains from the sale of a residence that would be excluded from taxable income.
Here's an example of how the new Medicare surtaxes will work. Let's say unmarried Dr. Able receives $180,000 in wages from his practice and $50,000 in investment income for a total income of $230,000. Dr. Able wouldn't be subject to the 0.9 percent Medicare surtax, because his wages are less than $200,000. However, he would be subject to the investment tax of 3.8 percent on $30,000, the amount in excess of $200,000 of modified adjusted gross income.
> Unreimbursed medical expenses. An itemized deduction is currently allowed for unreimbursed medical expenses that exceed 7.5 percent of an individual’s adjusted gross income. Beginning in 2013, these expenses must exceed 10 percent of adjusted gross income to be deducted. If an individual or his or her spouse is 65 or older by the end of the year, the current 7.5 percent threshold will continue to apply through 2016.
Now take a deep breath and read on for a few tips on managing all these new tax increases.
With the scheduled increase in the maximum long-term capital gains rates from 15 percent to 20 percent in 2011 and the looming 3.8 percent Medicare surtax in 2013, high-income individuals should consider recognizing gains in 2010 instead of deferring them until 2011 or later.
Other tax strategies to consider:
> Invest in tax-free bonds that do not pay taxable interest.
> Beef up practice retirement plans and consider Roth IRAs that don't generate taxable investment income.
> Take a look at tax-free life insurance contracts as an investment vehicle in your portfolio.
> Consider S corporation status for your practice. As long as you pay practice owner(s) wages of fair market value, excess earnings can be distributed as S corporation distributions that aren't subject to normal payroll taxes. You should know that using S corporation distributions this way to avoid FICA and Medicare tax has been a hot discussion in Congress lately, but so far nothing has changed.
As with all significant law changes, it's important to take two aspirin and have a sit-down with your tax advisor to discuss how the new rules will impact you and your veterinary practice. It's always worth your while to figure out how to implement personally tailored tax-savings strategies. Happy tax-break hunting!