Most chiropractors, when it comes to the subject of taxes, are lacking effective tax planning to adjust their tax savings. This is the cause of substantial financial loss and pain. Answer these questions:
- Are you happy with the taxes you pay?
- Are you confident that you are taking advantage of every tax break available to you?
- Is your tax advisor being proactive about the advice provided on saving your money on taxes?
If you like most chiropractors and small business owners, you probably answered “no,” “well no,” “I don’t know.’ If these are your answers, there is some bad and good news to follow.
The bad news is that you are more than likely paying way too much in taxes, possibly tens of thousands more per year than what’s required by law. You’re also probably not taking advantage of every tax break available to you.
Reading the tax code can be tiresome since it is incredibly complex, with thousands of pages of regulations. The fact is that there is no one taking full advantage of any tax exemption and tax savings that is open to them, simply because there are too many of them.
The good news is that all you need is a better strategy, a legally and ethically sound tax planning. And guess what? You’re already going in the right direction by owning a company that is a tax haven in itself.
Your choices every day will impact your tax bill as well as your tax savings. That is why you have to make sure that you are making the right decisions to enhance your overall financial goals. Ask yourself every day, am I leaving my money on the table? If you are, then you’re likely making the following three mistakes:
Failing to Plan for Tax Savings
There’s an old saying by Benjamin Franklin that says, “If you fail to plan, you are planning to fail.” No matter how good you and your tax preparer are with your towering stack of receipts at tax-filing time, if you don’t know that you can write off your daughter’s braces as a practice expense, then you are probably paying more in taxes than required.
Tax planning is the key to financial defense. As a company owner, you’ve got two options to increase the amount of money in your bank. First is going on the financial offense, which means you make more money. Second is going on financial defense, which means you spend less money. Everyone is trying to make more money without even realizing that spending less money is easier to do.
How do you spend less money? Taxes are more than likely your most significant expense as a business owner. So, let’s focus on that and do some tax planning as tax planning guarantees results. You can invest endless hours and resources marketing your business, but it still doesn’t guarantee results. However, you can set up a medical expense reimbursement plan, deduct the cost of your daughter’s braces, and guarantee tax savings.
But to guarantee results, you have to start with proper tax planning.
One of the greatest mistakes that small business owners make is fearing rather than respecting the IRS. Many chiropractors are afraid to take the exemptions they are entitled to because of fear of raising the red flag.
What are the odds of being audited? The chances of being audited are so low that most valid deductions are unlikely to attract the IRS’s attention, and you should never be afraid to make a logical deduction. Remember that this your money on the table. If a tax advisor recommends against taking advantage of a technique you believe you deserve, make sure to remind them why and wait for a valid reason. Again, that’s your money on the table.
Wrong Business Entity
Most chiropractic businesses start as sole proprietors. As they grew, they establish a limited liability company or corporation to help protect them from practice liability.
Although they choose to do so to protect them from practice liability, they should reconsider the tax consideration as well. Many chiropractors are still operating as entities that may have worked for them when they were established, but now they aren’t working effectively.
The following are three ways you can organize your business:
- Sole proprietorship – a company you operate yourself, in your name or trade name, with no partners.
- Partnership – an association of two or more partners.
- C corporation – a separate legal “person” organized under state law.
- S corporation – a corporation that elects not to pay tax itself. Instead, it files an information return and passes income and losses through to shareholders according to their ownership.
- Limited liability company or limited liability partnership – an association of one or more “members” organized under state law.
When you operate your business as a sole proprietor or are taxed as a sole proprietor, you may pay as much in self-employment taxes as you do in income taxes. If that’s the case, you should consider setting up an S corporation to reduce your exposure.
When you are taxed as a sole proprietor, you report the net income on Schedule C, and you’ll pay tax at whatever your rate is. You will also pay self-employment tax and are subject to a Medicare surtax of about $200,000 if you’re single, $250,000 if you’re married and filing jointly, or $125,000 if you’re married and filing separately.
You still have to pay yourself “reasonable compensation” for the service you provide as an employee (i.e., the salary that you would typically pay an employee to do the work you do). If you don’t pay yourself anything or even a small amount, the IRS can re-characterize all of your income as wages and hit you with some remarkably high taxes, interest, and penalties. It’s essential not to get greedy. According to the IRS, the average S company spends nearly 40% of its income in wages and 60% in distributions.
As you read this, I hope you’ve been enlightened and learned some things that can grow your business in wealth. Maybe you’re operating as the wrong entity, or perhaps you haven’t done any proper tax planning, or you may not have understood the value of it all.
Take the time to truly look at your taxes with new perspectives and establish your tax plan to help you achieve your financial goals. These are only three common mistakes that chiropractors make out of many. Stop settling and start saving more of your hard-earned money.