Hot tax tips for 2011 (Proceedings)

Tax laws are forever changing and this year is no exception. Since taxes can take a significant amount of our earnings, it pays to know and understand the tax laws that are important for you and your practice. This clear understanding can save you money and keep you out of tax trouble.

The new health care reform law is chock-full of new taxes and tax increases that will affect many individuals and businesses, but it will be years before most of these hikes take a bite out of your — or your company's — wallet. The law also has tax breaks to help both individuals and small businesses pay for insurance.

New health care tax provisions:

1. A new 10% excise tax exists on indoor tanning services on services provided after June 30, 2010.

2. The new law gives veterinary practices tax credits as incentives to provide coverage, started in 2010, employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35% of their health premium costs each year through 2013. The credit is phased out for practices larger than that and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more. Beginning in 2014, small veterinary practices that sign up with one of the health exchanges to be created can receive a credit of up to 50% of their costs.

3. A requirement that businesses include the value of the health care benefits they provide to employees on W-2s, beginning with W-2s for 2011.

4. Elimination of a deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage. This will not take effect until 2013.

5. Doubling the penalty for nonqualified distributions from health savings accounts, to 20%, beginning in 2011.

6. A limit on the amount that employees can contribute to health care flexible spending accounts to $2,500 a year, but the cap won't take effect until 2013.

7. A ban on using funds from flexible spending accounts, health reimbursement arrangements or health savings accounts for the cost of over-the-counter medications, starting in 2011.

8. Starting in 2013, a 0.9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and over $250,000 for married couples. Also, for the first time ever, a Medicare tax will apply to investment income of high earners. The 3.8% levy will hit the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds the $200,000 or $250,000 threshold amounts. The new law defines unearned income as interest, dividends, capital gains, annuities, royalties, and rents. Tax-exempt interest won't be included, nor will income from retirement accounts.

9. A hike in the 7.5% floor on itemized deductions for medical expenses to 10%, beginning in 2013. But taxpayers age 65 and over are exempt from the cutback through 2016.

10. A new 40% excise tax, beginning in 2018, on high-cost health plans, levied on the portion that exceeds $10,200 for individuals and $27,500 for families.

11. A new tax on individuals who don't obtain adequate health coverage by 2014. The tax is be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of income, in 2016.

12. Providing a refundable tax credit, once the individual mandate takes effect in 2014, to help low-income folks purchase coverage. To be eligible, a person's household income must be between 100% and 400% of the federal poverty level, generally around $11,000 to $44,000 for singles and $22,000 to $88,000 for families.

13. A nondeductible fee charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will equal $2,000 times the number of employees, though it won't count the first 30 workers in that calculation.

The hiring incentives to restore employment act of 2010

On March 18, the President signed the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-47) into law. As can be inferred from its title, it includes new incentives to encourage hiring. But it also contains provisions to encourage investment in business machinery and equipment, as well as new crackdowns on offshore noncompliance and other provisions. Specifically, the HIRE Act:

Exempts employers from paying the employer share of Social Security employment taxes on wages paid in 2010 to newly hired qualified unemployed workers. These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2) were previously unemployed and (3) do not replace other employees of the employer. The payroll tax relief applies only for wages paid with respect to employment beginning on Mar. 19, 2010 (the day after the enactment date) and before 2011.

Provides employers with an up-to-$1,000 tax credit for retaining qualified unemployed workers. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

Other tax provisions you should be aware of for 2011 and beyond.

A traditional IRA can be converted to a Roth IRA by paying the tax on the conversion and in the year of the conversion. Previously this conversion could only be made if modified adjusted gross income is $100,000 or less. This modified AGI limit on conversions of traditional IRAs to Roth IRAs, is eliminated to tax years beginning after December 31, 2009.

Consider selling a practice vehicle before trading it in. It may provide a current tax loss not otherwise available.

Reduce your taxable income by recognizing credit card charges an additional expense even when the credit card is not paid and you report on the cash basis. The IRS views credit card obligations as debt and not vendor accounts payable.

Consider IRS Section 125 plans for health insurance if your employees are asked to contribute towards their health insurance costs. These plans can also be used for group term life insurance and short-and long-term disability insurance. In a more complicated format they can be used for reimbursement of medical expenses not covered by insurance and dependent-care reimbursement. The use of these plans will be limited under the new health care rules. Pet insurance provided to employees is not included and must be considered a taxable fringe benefit included in the income of the employee each year.

Consider long term care insurance as part of your overall financial plan. The premiums are deductible within limits.

"Tax relief, unemployment insurance reauthorization, and job creation act of 2010"

The "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year "patch" of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here's a look at the key elements of the package:

     • The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.

     • Employees and self-employed workers will receive a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.

     • A two-year AMT "patch" for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

     • Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.

     • Businesses can write off 100% of their new equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

     • Many of the "traditional" tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.

     • After a one-year hiatus, the estate tax is reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

Cost segregation studies

If you are depreciating your hospital building over 39 years, you may be missing out on accelerated depreciation of certain components.

It is true that business buildings generally have a 39-year depreciation period. However, some items of property that are, seemingly, "part of the building" can, nevertheless, be depreciated over a period for shorter than 39 years. Generally, the speedier depreciation is available for items that service the equipment used in a building, but isn't available for items that service the operation and maintenance of a building. The concept in getting quicker deductions is through cost segregation. Make sure your builder or architect provides you the documentation that cost segregates your project. A tax court case involving the Hospital Corporation of America set the stage. The court case allows building costs, if segregated, to be written off over much faster lives. If certain items can be considered tangible personal property, you may even be able to expense them under IRS section 179 in the year of purchase.

What costs are we referring to? Well, as an example, electrical wiring directly related to a piece of medical equipment or to computers can be considered part of the cost of the equipment and can be expensed or written off over 5 or 7 years. This might include wiring for x-ray machines or surgical lights. How about plumbing for a wet table or automatic processor? They should qualify for accelerated write off as well as the cost of cabinetry. When it comes to flooring, the cost of tile must be written off over 39 years but the cost of vinyl floor covering or carpeting qualify for a 7 year write off. Landscaping and paving is covered under a 15 year write off.

If you finished a building project in a previous year, it isn't too late to get the benefit of speedier depreciation for any other items that were incorrectly assumed to be part of your building for depreciation purposes. You don't have to amend your past returns (or meet any deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next return that you file, that will result in "automatic" IRS consent to a change in your accounting for depreciation. Among the results of the process will be a one-time downward adjustment in your income, equal to the amount of the unclaimed depreciation. There are, however, some things to consider before beginning the process. One consideration is that you must do the work, probably with the help of your contractors or other construction experts, of identifying and substantiating the qualifying costs. Another consideration is that, before starting the work, you must judge whether the work will result in overall tax savings greater than the costs of the work itself.

Rent and practice real estate

Separate the practice real estate from the practice entity and pay a fair market value rent. The industry average for rent expense is 5 to 8 percent of gross revenue. Generally, fair market value rent can range between $12 and $18 a square foot on a triple net basis depending on geographic location. Another way to look at fair market value rent is to pay 10% of the fair market of the property yearly based upon a current real estate appraisal.

Many veterinarians own their practice and their practice real estate and in two separate entities. The practice, many times, is owned in a corporate environment ("S" Corporation) and the real estate in an LLC. This provides you all the legal protection you need, but rental activity is treated as a passive activity for income tax purposes subjecting a loss related to the activity to a $25,000 limit and this only true if your modified adjusted gross income is less than $100,000. Between $100,000 and $150,000, the loss is phased out to where no rental loss is deductible at all above $150,000. The amount not allowed is suspended and deducted in a year when you either have passive income or in the year when you dispose of the property.

If you acquire a new veterinary hospital or build one, consider a cost segregation study. These studies are performed by engineers who specialize in this type of work. By performing such a study, many components of the building can be accelerated for depreciation purposes, taking many parts of the building from a 39 year write off period to a 7 to 15 year write off period. The properties who can benefit most from these studies are those costing a million dollars or more. Using these studies generally produce rental losses well beyond the $25,000 limit.

Special rules found under IRS code section 469 allow for the grouping of activities so if each owner of the your hospital has the same proportionate ownership interest in the hospital real estate, your hospital and real estate activities can be grouped together. Once grouped, the real estate activity is treated as part of the hospital operating activity and the loss from the rental is no longer subject to the $25,000 passive loss limitations stated above. To gain the advantage of using these rules, you must elect on your tax return, your grouping of activities in the year they come into existence. If you have already created or not created your groupings, you cannot regroup your activities to get a better tax break. This requires planning and good discussion with tax council the year you are placing a new hospital building into service.

As an example, let's say you own 100% of your hospital operated as an "S" corporation. You have been operating in a strip shopping center and decide to build a new 1.2 million dollar facility for which you commission a cost segregation study. You set up the ownership of the real estate as a LLC for which you own 100% as well. Your write off for depreciation using the cost segregation study in the first year is $105,000 and with mortgage interest and other expenses, total rental expenses are 180,000. Rental income is $120,000 so the loss from the rental activity is $60,000. If you don't group your activities, your rental loss could be zero. If you elect to group your activities, you get the full 60,000 loss. As you can see, a little planning is worth a lot of tax dollars and with taxes expected to rise, finding ways to save them can be a nice addition to your piggy bank.

Employee vs. relief veterinarian

To determine whether a worker is and independent contractor or an employee, IRS examines the relationship between the worker and the business, and considers all evidence of control and independence. The facts that provide this evidence fall into the following three categories:

1. Behavioral control covers facts that show whether the business has a right to direct and control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, etc. And employees are often trained to perform services in a particular manner.

2. Financial control covers facts that show whether the business has a right to control the financial and business aspects of the worker's job. This includes the extent to which the worker has unreimbursed business expenses; the extent of his investment in the facilities being used; the extent to which he can realize a profit or incur a loss. For example, independent contractors are more likely to have unreimbursed expenses, be available to work for others in the relevant market, and make a profit or loss.

3. Type of relationship includes written contracts describing the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which services performed by the worker are a key aspect of the company's regular business. For example, an employee's relationship is more likely to be permanent and an employee is more likely to provide services that are a key aspect of the business.

Taxpayers who would like IRS to determine employee status can file Form SS-8, which reflects the factors noted above. The previous 20 point test used by the IRS is no longer valid.