No one wants to pay more taxes than necessary. In this article, we explore eight different tactics for optometrists to reduce their tax bill.
1. Delay billing for work carried out late in the year
Provided that your business has a healthy cash flow, postponing billing until the following year to enable you to defer your taxes for a further 12 months.
2. Accelerate business expenses
To reduce this year’s tax bill, business owners could settle invoices now that are not due until next year. Alternatively, practice owners could mitigate their tax liability by bringing forward purchases of big-ticket items like computers or office furniture, or carrying out renovations and improvements to offices or rental properties to reduce taxable income for the current tax year.
3. Maximize retirement contributions
In addition to undertaking all of their own retirement planning, small business owners may feel responsible for helping employees to save for retirement. The US government offers tax breaks to employers who invest in employees, as well as incentivizing business owners to save for their own future.
By matching employee contributions, small business owners provide workers with valuable retirement savings opportunities, inspiring loyalty. Where a practice owner operates a matching scheme, employer contributions are tax deductible.
In terms of their own retirement strategy, business owners have other alternatives besides relying solely on their business to fund their retirement. Those who pay themselves a salary could invest in a 401(k) plan or SIMPLE IRA. By placing income in a retirement plan, business owners not only benefit from deductions, but also defer tax on income earned on their contributions.
4. Write off unpaid bills as non-collectible debt
If you have an account with a customer who is unlikely to pay, you can write this off as a non-collectible debt. The IRS allows sole proprietors to claim bad debt deductions via Schedule C of Form 1040, Profit or Loss From Business.
Other deductible bad debts could result from loans to clients, employees, distributors, and suppliers, and business loan guarantees. A business may deduct bad debts, in part or in full, from gross income when calculating taxable income. The IRS Publication 535, Business Expenses provides further information.
5. Employing a spouse
Many optometrists’ spouses are involved in the day-to-day running of the business, be it answering the phone, setting up the computer system, or managing the practice. If they help out the practice in a legitimate way, it is in order to pay them for it.
If they only help out from time to time, or work from a home office, many optometrists fall into the trap of failing to recognize their spouse as part of the staff. However, employing a spouse and paying them a nominal wage is allowable under IRS rules. This creates scope to defer a portion of their compensation into the practice’s retirement plan.
6. Optimizing business structure
Structuring a business in the right way creates scope for substantial tax savings.
Richard M. Colombik, an attorney and Certified Public Accountant, cites business structure as the single most overlooked aspect of tax planning, pointing out that businesses that start out as small-scale enterprises often fail to upgrade their business structure at the appropriate time.
Colombik gives the example of an LLC or S corporation: a closely held company that passes income through to the owner. While he says there is nothing inherently wrong with either of these business structures are fine, as a company evolves it may be beneficial to look at alternative models that could be more advantageous from a tax perspective.
7. Consider alternatives to pay increases
It is vital to reward employees for outstanding performance to inspire loyalty and boost workplace morale. Nevertheless, there are alternatives to a pay raise that are much more effective in terms of saving taxes.
If an employer gives an employee a pay raise, the employee has to pay more income tax, Medicare, and FICA taxes. Equally, the employer would also incur additional expenses in matching employee contributions. One alternative is offering to increase medical insurance contributions, avoiding the tax implications of a pay raise for both sides.
8. Claim all deductible expenses
Small business owners often focus on the most well-known tax deductions, overlooking lesser-known deductions for which they may qualify.
Commonly claimed small business tax deductions include:
Business tax deductions lower taxable income, potentially reducing tax liability significantly. It is prudent to take professional advice to learn more about the different deductions your business may qualify for, potentially saving you and your business thousands in overpaid taxes in the long run.