9. Increased business property deductions
The nature of many physician business operations has drastically changed this year. For physicians who already have invested in and implemented new telehealth infrastructure, this can create valuable tax deductions to offset their ordinary income. Businesses may take 100% bonus depreciation on the cost of qualified property both acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In general, during the last quarter of the year, you should look to decelerate business purchases until after Jan. 1, 2021, to get a deduction in 2021 at a higher marginal tax bracket.
10. Switch to cash accounting instead of accrual accounting
With higher expenses and lower profits, some large practice groups may take a second look to see whether they qualify to switch to cash accounting from accrual accounting to defer taxes. This rule change was adopted back in 2017 to allow small-business taxpayers with average annual gross receipts of $25 million or less in the prior 3 years to use the cash method of accounting. Ultimately, this switch should allow practices to owe the IRS money only after invoices were paid.
11. Physicians looking to sell their unprofitable practices
For physicians looking to make a quick exit from their practice in response to the pandemic, there is some tax relief in the event of a sale at a loss. Certain business owners who sell failed businesses will be able to use up to $50,000 of net losses as individuals or $100,000 as joint filers from the sale to offset ordinary income, current or future, under Internal Revenue Code (IRC) Section 1244. Remember that ordinary income tax rates are much higher than capital gains rates, so you could see some tax relief through a sale. The provision covers shareholders of domestic small-business corporations, both C or S corporations, but not partnerships. You would have to sell the business before Dec. 31 to get this deduction in 2020.
12. Physicians looking to sell their profitable practices
Even self-employed physicians who have managed to maintain profitable practices may be looking for early retirement after the exhaustion of the pandemic. If you own stock in a C corporation engaged in an active trade or business that has not had assets of more than $50 million at any time, you can take advantage of the IRC Section 1202 exemption. Section 1202 provides an exclusion from gain from the sale of stock of either $10 million or 10 times the adjusted basis of the stock, owned at least 5 years, in corporations regarded as “qualified small businesses.” This means you may be able to sell your practice at a gain with a handsome tax shield. Again, to get this tax benefit for April’s tax return, you’d have to engage in this activity before year end.
Regardless of whether the pandemic has placed financial constraints on you this year, tax-savvy opportunities are available to capitalize on your reduced income and lower tax rates. It’s always important to keep in mind not just your taxes in any one given year, but your lifetime tax obligations. Financial advisors and tax planners can perform multiyear tax calculations and recommend ways to manage your tax bracket and help lower your overall lifetime tax obligations.