Tax write-offs could save your veterinary business hundreds or thousands of dollars. Whether you’re a small solo practice or a clinic with staff, taking all the tax deductions for which you’re eligible is essential. It’s often easy to overlook deductions that can lower your taxable income.
Contact your CPA to see how your own business and personal taxes can be handled legally; every situation is different. This article does not constitute legal tax advice.
However, not all deductions are created equal for all taxpayers, cautioned Jennifer M. Braid, an accountant at Veterinary Practice Made Perfect. Just because something is eligible as a “write-off” does not automatically create an advantageous tax position.
“Congress fiddles with the law regularly, and keeping up with what expense write-offs are allowed this year versus last year or next year can be, well, a taxing ordeal—pun intended,” said Marsha Heinke, owner of Veterinary Practice Made Perfect.
Working with a skilled accountant can help any practitioner unravel the complexity of the ever-changing tax code. The starting point is the law, which defines what deductions are allowed against income and that veterinarians want to consider, although the value and eligibility is based on each situation. IRS publications available at IRS.gov are an important starting point to help taxpayers interpret the tax code and describe how and what deductions can be taken.
“If you don’t get your taxable income as low as possible, you’re essentially taking money out of your pocket and giving it to the government for free,” Whitney Marietti, owner of Marietti Accounting Services. “That, coupled with the fact that a business is likely to get audited at least once during its lifetime, means that the health of the vet clinic could rely directly on the legitimacy and amount of a clinic’s tax write-offs.”
Talk to your CPA or tax preparation service to find out if you’re eligible for these 10 tax deductions in order to maximize your practice’s opportunity to reduce its taxable income.
1. Rent your home to your business. The Augusta Rule is often overlooked, according to Marietti. This allows a business owner of certain entities to rent his or her personal home to the business for qualifying purposes.
“You can’t just throw a large party at your house,” she said. “But when done properly, the rent is deductible to the business and is not taxable to the business owner. You essentially take money out of one pot that is taxable and put it into another pot that is not.”
2. Immediate expensing or deduction of practice equipment. Braid explained this can be accomplished through the section 179 depreciation deduction or bonus depreciation, depending on what is allowable in a particular tax year.
“Keeping track of hand instruments and other small pieces of equipment can help you save money in the long run,” Marietti said. “Simple tax knowledge like this can save a client thousands of dollars or more in taxes every year. When that money gets invested back into the business, it makes a large difference.”
3. Office supplies. Medical supplies and related equipment are easy to remember. But you can easily overlook everyday office supplies such as pens, paper and other necessities. Taking the time to organize and manage receipts of these supplies can be worth some savings at the end of the year.
4. Mileage. This can include the clinic’s employees and the mileage taken on a personal vehicle when an emergency call comes through, Marietti said. Tracking the date, time and length of each trip is critical. Apps like MileIQ and others can make it easy to capture and store this information. Remember to include gas, insurance and repairs on business vehicles.
5. Payroll for your children. If done correctly, the payroll for your children can be done tax free, according to Mike C. Manoloff, PC, a Texas-based accountant. Sole proprietors and spouse-only partnerships can take advantage of this tax break, which allows small businesses to deduct a child’s salary from the business income. In these situations, no Social Security or Medicare is paid on those younger than 17 and no unemployment taxes are charged for those under 21.
6. Continuing education. The cost of conferences, seminars and educational activities, including travel and a portion of meals, can be considered tax deductions. Extending an out-of-town stay by a day or two can also give a much-needed vacation; however, tacking on an extra week doesn’t qualify.
7. Client perks. Prior to the Tax Cuts and Jobs Act (TCJA), businesses could write off entertainment and client appreciation outings. While that is no longer the case, it is still allowable to deduct travel expenses and up to 50% of meals, as long as they are reasonable and have a direct business purpose.
8. Employer contributions to sponsored benefit plans. Health insurance and retirement plans often allow for the practice to deduct the benefit payments while providing those valuable benefits to the owners, according to Braid.
9. Professional services. When paying for professional services, it’s worth investigating if they can be a deduction. Accounting services, tax preparation, cleaning/janitorial services, legal and consulting fees, and other services might fall into an eligible category.
10. Form an S Corporation. Once a business reaches a certain level of net income, electing to be taxed as a S Corporation can save business owners the 15.3% of FICA taxes on income beyond what is considered reasonable compensation for its owners, Marietti noted. She estimated a savings of more than $30,000 per year for a clinic making $200,000 after reasonable compensation.
Keep Good Records
Before you see dollar signs adding up with new-found tax deductions, remember that every expense must be documented. There should be a clear trail showing expenses and cash receipts. Records should be maintained as they occur and never reconstructed after the fact.
IRS revenue officers are trained to closely examine cash sales, according to Marietti. While most veterinarians don’t typically handle large sums of cash, it’s critical to have a clear trail of cash transactions. Therefore, all cash receipts should clearly be tied to a report from the clinic management program showing daily cash receipts and also to a bank deposit. Daily deposit slips that exactly match these amounts with a reconciliation to the cash drawer are ideal.
“The IRS will accept electronic bank statements as proof that a purchase actually occurred, but those statements don’t show exactly what was purchased, and if a revenue officer cannot determine if the purchase is personal in nature, they may disallow the deduction,” Marietti said.
The best practice is to keep receipts showing an itemized list of everything that was purchased. Scanned copies are acceptable. Marietti added that the IRS has a publication dedicated to teaching their revenue officers how to audit veterinary practices. (You can find the 2005 version here, but check with your CPA to ensure it is the most recent document.)
“Most people don’t know this, but it’s readily available online, as are other publications detailing the exact audit procedures the IRS uses to train their auditors,” she said. “Revenue officers are trained that vets often have numerous personal pets of their own and that the expenses related to the care of those pets is often run through the clinic as a business expense.”
The length of time a business is required to retain records varies based on the individual document, Braid said. For example, documents such as deposit slips, invoices and bank statements likely can be purged three years after taxes are filed. However, items such as payroll records should be maintained for at least seven years, with legal documentation and tax returns kept indefinitely.
Tracking expenses is always important, but any practices that have taken advantage of state or federal coronavirus pandemic relief packages must be extra diligent. Whether it’s the Paycheck Protection Program or the Small Business Administration disaster loan, it’s imperative to track how and when the funds are spent.
“Right now, practices should be taking care to collect and archive all the required records for forgiveness of loans taken under the Paycheck Protection Program,” Heinke said. “The IRS requires borrowers to retain documentation for at least six years after the date the loan is forgiven or paid in full.”
Tax strategies and management of tax liability are key to running a financially sound veterinary practice. Most veterinary practices capture valid write-offs quite well, Heinke said. However, strategizing payment timing in a way that mitigates tax cost is often overlooked.
For example, an individual taxpayer bundling charitable contributions or medical payments into a single year can capture more tax deductions if planned correctly.
“Another example is timing write-offs to occur in a year where an owner’s marginal tax rate is predicted to be higher. Or timing income, such as selling a veterinary practice, in a year where rates are going to be lower, either due to enactment of new laws or because the taxpayer’s other sources of income will be lower.”
Overlooked tax savings opportunities often occur because a business owner hasn’t engaged in true tax planning. Set aside time to meet with your accountant at least once or twice a year to ensure your estimated tax payments are accurate and to get your taxes prepared.