Best Tax Deductions for Healthcare Practice Owners

Proven tax procedures that restrict the tax liability of clinics, practices and other health care ventures

Managing a healthcare business means you are constantly managing as well; there is provision of patient care, concerns about operations and compliance with the government, and committing to the numbers game. One area where owners can have a direct impact to the bottom line is smart tax planning. In this blog post, we discuss the most popular healthcare tax deductions and how to maximize savings with some helpful tips, along with what records you must keep when taking them so that you can lower taxable income without risking violations.

Learn the fundamentals before you say "Look at me!

Make sure an expenditure is ordinary and necessary for your trade or business before you apply the deductions. Ordinary, meaning common in your trade; necessary, meaning useful and appropriate. A lot of healthcare practice owners treat their business expenses the same way in order to prevent red flags. If in doubt, you may wish to check with a tax advisor about eligibility and timing.

Common deductions for healthcare businesses

Employee wages and contractor payments

Salaries, employer-paid payroll taxes and payments to independent contractors are tax-deductible. For practices with clinical and administrative staff, it is likely the single highest deductible spend. Maintain clear payroll records, time sheets and contractor agreements.

Health insurance and fringe benefits

The cost for employee health insurance, employer contributions to retirement plans and other eligible fringe benefits is deductible. Owner health insurance premiums could be deductible under some situations, so monitor how policies are structured as to whether they’re taken through the business or personally.

Rent, utilities, and facility costs

Office or clinic space rent, utilities including heat and electricity, maintenance expenses, and janitorial services are deductible. If you work out of a multi-use building, divide expenses in your home between personal and business use properly. Leasehold improvements will be depreciable or amortizable; review the depreciation rules to determine if writing off immediately vs. over several years is appropriate for your business.

Medical equipment and supplies

Deductions for small supplies and low-cost items are generally available in the year of purchase. Bigger gear may be able to be written off through various expensing tools or depreciated over a recovery period. Explore 179-style election possibilities (or the applicable tax code) to expense qualifying property in the year acquired. Retain invoices and evidence of use at the practice.

Malpractice insurance and professional liability

Note: The costs of your malpractice insurance and other professional liability coverages are business deductions. Have and keep hands on policy documents in the business name, if possible.

Continuing education and licensing

The costs of getting federally mandated licenses and professional dues, continuing education and conferences that keep or improves professional skills are deductible. Schooling for required courses as they relate to travel and lodging, (subject to) the travel deduction rules.

Vehicle, travel, and mileage

Deductions: If clinicians or staff travel for business, whether that is seeing patients, training or purchasing supplies, these costs can be taxable. Keep track of the actual costs or standard mileage rate. For away from home travel, maintain comprehensive evidence for trips that includes the reason, length of time away, and business activities to document your deductions.

Marketing, advertising, and patient outreach

An advertising budget, website expenses, and patient retention programs as well as referral outreach are reasonable business deductions. Distill out advertising versus capital expense (for instance, a major website overhaul may be capitalized), and document marketing campaigns and invoices.

Professional fees and outsourced services

Accountant, lawyer, billing company, compliance consultant and other professional fees are deductible. Capitalize or expense long-term service costs in line with tax guidance for services that bring enduring benefits to the group.

Depreciation and amortization

Big investments — say, in imaging machines or major clinic renovations — are typically amortized over useful lives. The cost of the assets are recovered over time through depreciation (that may be available immediately when immediate expensing can be elected). Keep lists of assets with description, purchase date and method of depreciation.

Startup and organizational costs

If your practice is new, you can generally deduct part of your first-year startup and organizational costs, amortizing the rest. Retain all invoices and documentation regarding the formation/market study/ pre-opening of the hotel.

Provision for bad debts and patient billing adjustments

In case billed amounts go uncollected, certain providers may write off bad debt. Instead, accrual-method taxpayers generally may deduct uncollectible receivables as bad debt; cash-method taxpayers generally get a write-off only for amounts actually uncollected and that had been previously included in income.

Recordkeeping and documentation

Good records are the key to defensible deductions. Keep paper files in order for your invoices, receipts, contracts, payroll records and insurance policies — if applicable proof of medical necessity. Be sure to maintain a consistent naming convention and date-stamp all documents. Contemporaneous records must be kept when you travel or use your vehicle.

Distinguish capital vs. expense

Certain expenses need to be capitalized and depreciated instead of being expensed in the year paid. This includes big equipment, capital improvements and certain software. Know which expenses are immediate write-offs versus capitalized for tax purposes and potential tax benefit.

Timing and tax strategy

Timing matters. You might be able to affect your tax liability by moving expenses into the current year or income into the next. Think about profitability of the practice, anticipated shifts in tax rates, and cash flow requirements before deciding on timing. End-of-the-year planning with an advisor can help find opportunities, such as prepaying deductible expenses or purchasing equipment to exploit expensing options.

Common pitfalls to avoid

• Commingling personal and business expenses: Maintain separate bank accounts and use a credit card for business.
• Lack of documentation: Failure to show proof, such as receipts or an absence of itemized invoices, can cause deductions to be disallowed.
• Misclassification: If you mislabel capital expenses as supplies (or vice versa), these types of classification errors could lead to audits or costly penalties.
• Ignoring state and local rules: Some deductions change by location; consult local rules and limits.

When you should hire a tax professional

Tax laws change, and of course vary by entity type(s), so consult your tax professional for planning associated with the specific entities or significant purchases or transactions such as practice acquisitions. Hiring a professional can be useful in establishing strong accounting systems, selecting the right retirement plan for owners and staff, and planning for possible audits.

Final thoughts

Conscientious tax planning and maintaining accurate records enable healthcare entrepreneurs to prevent money from disappearing needlessly that might otherwise be redeployed into patient care and expansion. When you know the basics of health-care tax deductions—wages, insurance, equipment and travel, for example—and when to classify an expense as a capital expenditure rather than an ordinary one, you can make choices that increase cash flow and limit tax liability. Begin with organized records, bring in professional assistance when necessary and revisit your tax position often to ensure you’re accounting for every legal deduction and staying on the right side of the tax man.