How a Practice Analysis Can Open Up New Tax Planning Opportunities

A comprehensive medical practice analysis involves digging into detail. The overall goal, of course, is to find opportunities for improvement.

Whether those opportunities are financial, qualitative, efficiency-based, or even personal, the question is the same: how can we create the same profitability, but spend less time doing it, so we can spend more time with our loved ones?

Is the most important profitability measure how much net income and net free cash flow is available to the owners? Or is it how much net income and net free cash flow is available to the owners after taxes?

A hidden gem of performing a comprehensive medical practice analysis can often be how it can open up new tax planning opportunities.

Here are a couple of examples:

20% Pass-Through Business Income Deduction

Have you heard of the new 20% qualified pass-through business income deduction effective in 2018? In short, up to 20% of certain eligible net income from pass-through businesses may qualify to be deductible to business owners.

However, for professional service businesses, if an individual taxpayer’s taxable income is too high, this deduction could be reduced, or phased out entirely. This potential phase-out, however, does not apply for non-professional service net income. Is everything you do in your medical practice really considered professional service?

A properly designed analysis should include a profitability analysis by department and/or various revenue streams providing a break-out of net income by department.

If your practice shows profit in areas that would not be considered professional service, that highlights an opportunity to maximize the potential benefits of this new deduction!

But, you have to identify and determine these separate profit centers. Next steps? How can we reasonably apply expenses in a fashion that maximizes our profits within our non-professional revenue departments? Consider prioritizing efforts to reduce costs and/or increase revenue within those areas of our practice over our professional service offerings.

What’s the best tax deduction?

It’s the one where you get a deduction, but keep the money! What is this magical deduction, you ask? We’re talking about contributions to your tax-deductible retirement plan(s).

A properly designed analysis should include a comprehensive review of your current retirement plan. Do you have the right plan? Are you maximizing what you can contribute to the plan? Have you ever explored a defined benefit plan or a cash balance plan?

In certain cases, a defined benefit plan may also help maximize the new 20% qualified pass-through business income deduction!

If you don’t know what a defined benefit plan or a cash balance plan is, you should talk with your financial advisor to find out if one could be the right fit for your practice.