Year-end checklist helps 2003 preparation

Gift lists are the hallmark of the holiday season and the well-organized mind. Shopping duties, generally anticipated as a fun activity, tend to quickly be completed as compared to other lists that occur at year-end. Issues of business management are procrastinated to a much greater extent.

Important management tasks may be overlooked or delayed perpetually inthe flurry of holiday planning at year-end. Although we cannot help youwith your holiday gift list, we can provide some bullet points of practicemanagement and tax-planning issues that should be considered before year-end.This list will help you organize the financial side of your life beforethe bell tolls on Dec. 31.

Cash accounts

Review petty cash box reconciliation reports. The box should be replenishedon Dec. 31 so an accurate accounting of all practice expenses can be madethrough the end of the year.

Evaluate checking and savings accounts. Many practices maintain multipleaccounts. Have you reviewed all bank statements during the course of theyear? Are regular reconciliations occurring? Evaluate large account balancesfor possible changes to interest-bearing accounts or alternative investments.Depending on your practice entity format, reducing cash balances at endof year may be part of the tax strategy to be discussed with the practice'saccountant.

Accounts receivable

Whether your practice is cash based or accrual based, now is the timeto examine the accounts receivable balance. How have accounts receivablebeen controlled through the year? Do large amounts in arrears validate achange in collections philosophy and protocol?

For cash-based taxpayers, deferring the last billing in December untillate in the month may be an appropriate move so that a substantial portionof December client payments are received in January.

For accrual-based practices, make specific identification of accountsthat cannot be collected. Hopefully, bad accounts have been identified ona regular basis and turned over to a collection agency or an attorney afterdocumented pursuit has been made by the practice's in-house collection staff.

By year-end, identify those accounts that have been actively worked andhave little probability of collection. Write off these bad accounts andprovide details of client names and account amounts to your accountant fordeduction on the tax return.

Inventories

Physical inventory counts should occur throughout the year but obtaininga value for supplies on hand is a must for end-of-year tax reporting.

Current IRS guidelines indicate that substantial supply and inventoryamounts on hand at the end of the year cannot be deducted until the latterof when payments for those inventories occur or when they are billed outto clients. Therefore, your accountant will need a fairly accurate accountingof medical supplies that are on hand at end of year that might have alreadybeen paid for but cannot be deducted since they have not yet been used inthe provision of client services.

Physical inventories give your staff a chance to identify outdated suppliesand excess amounts. Send them back to the manufacturer for refund as soonas possible.

Make note of physical storage. How scattered and unsecured have the practice'ssupplies become? In practices with a long history and scant storage space,supplies may be squirreled away all over the hospital. Out of sight; outof mind. Take the opportunity to find out what you have and consolidatethe inventories to the extent possible for the space available.

Annual capital expenditures

For veterinary practices, a significant year-to-year capital reinvestmentwill be in medical equipment and computer technology. Each year, cumulativepurchases should be checked before year-end.

Ask for a detailed computer run of the transactional detail for the year.This could be a Quicken printout of the checking registers. It may be ageneral ledger by account category.

Review transactional detail for any equipment transactions that mighthave been overlooked and classed as current expenditures rather than significantimprovements, betterments or new equipment purchases.

Sometimes, unknowledgeable bookkeepers will simply expense significantpurchases that should be recorded as property purchases, subject to depreciation.

Once you have an accurate assessment of the equipment purchases to date,measure this against the possible Section 179 election deduction limit.For 2002, up to $24,000 of eligible purchases can be expensed.

Additionally, bonus depreciation through the Job Creation Workers' AssistanceAct of 2002 provides an allowance equal to 30 percent of the adjusted basisof the qualified property. In other words, through use of Section 179, accelerateddepreciation, plus the 30 percent allowance, deductions can be greatly acceleratedfor assets put into service by year-end.

Discuss with your accountant whether any tax return adjustments needto be made to capture 2001-year bonus depreciation that may have been overlookedbecause the law did not change until March 2002. Special rules and guidelineshave been provided by the Internal Revenue Service since the Act was passedin March 2002 to retroactively account for asset purchases from Sept. 11through Dec. 31, 2001.

As part of long-range planning, consider envisioned equipment acquisitionsfor 2003 and 2004. With very low interest rates and bonus depreciation availablethrough Dec. 31, 2004, incentive exists to possibly accelerate longer-termpractice equipment needs you see evolving.

Demand for veterinary services is strong despite the recessionary economy;animal owners continue to be willing to pay for services. Logically planout your practice's technological needs for equipment that will generateadditional revenues and/or increase staff efficiencies.

Practice loans

Now is the time to review existing loan documents. What requirements,if any, must be fulfilled to meet bank loan committee requirements? Is loanrefinancing in order, because interest rates will continue to be quite favorable?Plan ahead for additional loans based on projected capital required fora practice facelift, equipment acquisition or facility expansion.

Related party loans

When meeting with your accountant, discuss any amounts owed to or fromrelated parties. If loans exist between you and the veterinary practice,then these should be documented and brought up to date. Many times in thecourse of daily operations, loans are casually made or advances taken frompractices. When loans exceed $10,000 in total, a fair rate of interest mustbe charged on such loans.

Amortization schedules and promissory notes should exist for any loansthat have been made to and from related parties. Clearly document any transactionsthat are intended to be repaid and do not represent a contribution of capitalor dividend payment.

Assure that interest amounts have been correctly recorded. Total interestamounts should be tallied and readily available so that Forms 1099-INT (informationreturn for reporting interest payments) can be prepared in a timely fashionafter the turn of the year.

Other legal documentation

Now is the time to freshen up other legal documents such as lease agreementsand employment contracts.

Review the real estate lease agreements and determine the last time theywere updated. Many times, real estate lease agreements exist with thosewho own the practice, a related party transaction. To the utmost extentpossible, such closely held real estate lease agreements should be handledas they would with any outside party. Payments should be timely and in exactaccord with the specifications of the document.

If lease agreements are out of date or have expired, now is the timeto bring them up-to-date. Incorporate cost of living increases to pass onthe implicit fair market value increase of the underlying real estate tothe practice entity.

Review equipment leases. Many times, equipment leases will automaticallyrenew. Do not be caught unaware making extra unnecessary lease paymentson equipment that should be purchased at conclusion of the lease by formalnotification of the company.

Review all employment documents. Are they current? Are any employmentagreements with associate veterinarians close to expiration that requirerenegotiation attention in short order?

Examine the general ledger detail for any evidence of any contract workersbeyond those you can name off the top of your head. Many times, during thecourse of the year, services will be contracted from a variety of individuals,such as computer repairs, lawn service and snow removal, as well as reliefveterinarians, attorneys and the typical litany of casual workers.

Once you have identified all potential contract workers, check filesto assure that W-9 forms exist for each and every individual. If some aremissing, now is the time to pursue them. Little is more frustrating thantracking down contract workers after the turn of the year so that requiredForm 1099s can be sent disclosing the amounts paid to them during the courseof the year.

While you are at it, check employee files. Are all W-4 forms and immigrationforms I-9 up-to-date? Keep in mind special rules for employee withholdingchanges. Marriage, divorce and additional dependents may all require thatthe employee update the W-4 form already on file. When in doubt, ask employeesto complete fresh W-4s before the end of the year.

Hospital credit card use

Special rules apply for credit card use by cash-based taxpayers. Practicepurchases made at year-end via credit card may be eligible for deductioneven though the credit card is not paid until January or February of thesubsequent year. For accrual based taxpayers, credit card charges almostalways represent amounts that can be deducted in the year the charge occurred.Assure that your accountant has copies of all credit card statements thatspan the end of the year so that a correct accounting and obtaining maximumdeductions for the practice can occur.

Some items to consider for purchase via credit card before the end ofthe year are:

* Practice printing expense needs - stock up on necessary officesupplies such as exam room report cards, stationery, envelopes, businesscards, hospital brochures and similar specialized paper products.

* Check out staff uniform condition. If they are tattered andworse for wear, consider ordering new uniforms for arrival before the endof the year. Use of the hospital credit card for this kind of purchase canrepresent a deduction for the year.

* Computer supplies or janitorial supplies represent other expendituresthat can be made by credit card.

Because drugs and medical supplies used in the course of patient therapyare precluded from deduction until the point that supplies are sold to clients,charging large volumes of drugs and medical supplies to credit cards maynot be a good plan.

Vehicle use

In general, vehicles that have a substantial personal use are most easilyaccounted for when they are titled to the individual practitioners ratherthan through the hospital. Most all practices incur some vehicle use thatis used for bona fide business purposes, such as trips to pick-up suppliesor for continuing education.

Before year-end, make sure that mileage logs (hopefully contemporaneouslymaintained) are up-to-date. Tally mileage and assure that all vehicle ownersare reimbursed for mileage by year-end.

The standard per mile amount is 36.5 cents for 2002. For the 2003 year,the business mileage amount decreases to 36 cents.

Keep in mind that when vehicles are titled to the practice, special rulesexist. Your accountant will need specific mileage use of the vehicles sothat the appropriate personal use of that vehicle can be included in theapplicable employee's payroll by year-end. The rules pertaining to business-ownedvehicles portion of personal use are extensive and complex. Please talkto your accountant to ensure they are handled correctly so you can optimizededuction.

Insurance coverage

Insurance rates have become much higher within the last few years inalmost all areas of risk management. Check policies to assure coverage isadequate.

Review practice general insurance for replacement cost coverage.

Are inventory values high enough? Is the estimate of fair replacementvalue of medical equipment appropriate? Is employee theft and bonding insuranceprovided?

If your practice has a retirement fund, is the appropriate level of insurancein force in accord with the bonding requirements?

You might also want to consider a review of your homeowner's policy atthe same time. Our personal finding is that these policies often go on fora series of years and are not adequately updated to reflect the true natureof assets owned by the practitioner. Insurance coverage may be inadequateor the detail may be incorrect so that claims, in the event of difficulty,might be contested by the insurance company.

For Subchapter S corporations, shareholders must assure that any healthand disability premiums paid by the practice are grossed up and includedin payroll to maximize the deduction available to those shareholders.

Again, this is an important issue to discuss with your accountant. Ideally,such premium gross-up issues should be considered before the last payrollof the year is cut so that the inclusion can be made in a timely fashion,before preparation of the final W-2 forms.

If any life insurance policies exist, review these with the accountant.Many practices have older life insurance policies based on what is calleda split-dollar arrangement. The IRS has recently provided much guidanceregarding resolution of these policies, which in the past have been viewedas possibly abusive situations. If you have any split dollar life policiespaid for by your business, then you should be discussing these and planhow to handle them in the future with your accountant.

Profit sharing and pension plans

Easy to get into and challenging to administer, and get out of, all plansare fraught with various perils that are unique to each type. The scopeof this article precludes discussing each plan type. At the least, you shouldtalk with your CPA about whether your plan documents are current and inaccord with the most current laws passed by Congress. Be aware that manyretirement plans fall under two areas of law: regulation by the IRS as wellas the Department of Labor. The combination of both lead to fiduciary burdensof which many practice owners are unaware.

Tax planning

Most practice owners have fairly significant and complex tax lives. Manytimes, business profits flow through to individual owner tax returns. Inthe last several years, we have seen veterinarians continue to perform verywell in their individual practice situations, despite doom and gloom inthe general press about the American economy. Practitioners are often facedwith unpleasant surprises at the time tax returns are due.

Your accountant can only help you if you provide enough information ona preliminary basis to make some educated guesses about what your specificsituation will be. Most accountants will provide tax planning at year-endif you are concerned about potential tax liability at April 15.

If your practice has performed especially well in this last year, andyou have been able to proactively retire debt, you may need to examine abit more carefully your individual tax circumstance to assure that quarterlytax estimate payments have kept up with the reality of your success. Don'tbe caught unaware.

Fee schedules

Last in this to-do list is the practice's fee schedule. Adequate assessmentof fees to your clients assures that you will have the necessary capitalto invest into the practice for new equipment, expansion, and to maintainan adequate standard of care. This standard of care is based on retaininga competent and well-trained staff.

Employee benefit programs, particularly those based in healthcare coverage,continue to escalate at rates far greater than most veterinary practicefee schedules. Employees demand a living wage in order to keep them enthusedabout their jobs. The only way you can maintain the compensation needs ofyour staff is through adequate attention to the fee schedule.

Don't procrastinate about increasing fees at the turn of the year. Makesure adequate increases are in place so the practice can continue to moveahead. If additional taxes are in store for you in April, the fact thatyou have been attentive to the fee schedule early in 2003 should help cushionthe blow by providing a bit of extra cash in the bank account in preparation.

Use this article as a starting point to discuss issues with your accountant.Next, your attorney is required to assure legal documents are up-to-dateand reflect the arm's-length nature of transactions with related partiesand that other aspects of practice legal documentation are up to snuff.

Don't look at these issues as another compliance burden, but, look atthem as an opportunity to maximize the return of your investment in theveterinary profession.