Tax Season 101: Insights into Filing a 2016 Tax Return

Editor’s note: The following information does not represent the views of the American College of Rheumatology (ACR) or The Rheumatologist. Please consult a lawyer or tax professional when making tax-filing decisions for yourself and/or your rheumatology practice.

With the 2017 tax season in full swing, rheumatologists who own their own practices want to know what new rules the Internal Revenue Service (IRS) has issued, what tax deductions they shouldn’t miss out on and how to avoid penalties as they complete their tax returns. Some good news: It may not be too late to reduce your 2016 tax liability, says Benjamin Sullivan, CFP, EA, client service manager, Palisades Hudson Financial Group in Austin.

Personal
“Although you usually need to pay an expense in 2016 to count it as a 2016 deduction, many self-employed physicians can deduct contributions made to certain retirement plans as late as Oct. 16, 2017,” Mr. Sullivan says. “Simplified Employee Pension—Individual Retirement Accounts (SEP-IRAs) are often the best option … if you did not plan ahead.”

You can set up and fund a SEP-IRA with as much as $53,000—or 20% of your net earnings from self-employment, whichever is less—any time before your entity’s tax filing deadline, including extensions. Contributions to profit-sharing plan accounts and employer contributions to 401(k) accounts can also be made as late as your practice’s tax filing deadline, but you need to have set up the plan before the end of 2016.

Property
There’s also a welcome change regarding the depreciation of smaller purchases. Although the IRS has always allowed taxpayers to claim a current deduction for ordinary business expenses that have a useful life of less than one year, it typically required taxpayers to claim depreciation over multiple years for items with a longer useful lifespan.

“For 2016, taxpayers can treat any invoices or items purchased for less than $2,500 as deductible in the current year, regardless of their useful life,” Mr. Sullivan says. “Note that the rule is limited to tangible property and does not include items that count as inventory. This change can both simplify a practice’s administrative burden and reduce its tax burden.”

Also, making special elections on your tax return can accelerate deductions into 2016.

“If you purchased new equipment in 2016, you would typically be required to deduct the value of an asset over the term of its useful life by claiming depreciation each year,” Mr. Sullivan says. “Instead, by electing to use Section 179 expensing, you can deduct the full value of an equipment purchase in the year of purchase up to $500,000. This election is especially valuable if you expect your 2016 tax rate to be higher than your future tax rates.”

Deadlines
The IRS has also made some changes to the filing deadlines, which rheumatologists who own a practice need to be aware of.

Beginning on Jan. 22, 2017, employers must use a revised I-9 Employment Eligibility Verification form. “If the form is not filled out correctly, your practice could be liable for penalties,” says Kelly Garrison, CPA, tax partner at Frazier & Deeter CPAs & Advisors in Atlanta.

Additionally, the deadline for Form 1120 U.S. Corporation Income Tax Returns has been moved back to April 15 (April 18, 2017, due to the holiday schedule) vs. the traditional March 15 deadline, Ms. Garrison notes. However, if you file Form 1065 U.S., the return for partnership income, or Form 1120S, the U.S. income tax return for S Corporation income, you need to get into gear earlier. The deadline for both forms is now March 15. A six-month extension period applies to both forms.

Finally, Mr. Sullivan offers a friendly reminder to be sure to keep accurate records and follow the government’s tax rules.

“Taxpayers love to ask tax preparers how much to deduct. Generally, the answer is ‘any ordinary and necessary expense that you actually paid,’” he says. “Playing within the rules is the best way to avoid a costly tax audit. Retain all canceled checks, receipts and other data and documents that form the basis of your income and deductions. You may need these to prove your returns’ accuracy and completeness to a taxing authority. Don’t worry about claiming large deductions or losses, as long as they are legitimate.”

Karen Appold is a medical writer in Pennsylvania.