After the sticker shock that accompanied last year’s tax code regulations, many will be happy that 2014 is going out on a quieter note. However, there are still some changes and lingering questions about a number of extenders that could adversely impact your bottom line on both a personal and professional basis.
Tony Jones, CPA, a tax services manager for HORNE LLP, said many high-earning individuals are still adjusting to the major changes in 2013 that included higher rates on net investment income and the additional Medicare tax. “’13 was also the year that personal exemptions and line item deductions phased out for high income taxpayers,” he added of the resurfacing of tax rules for individuals with an adjusted gross income over $250,000 and married couples with AGI over $300,000.
“In Tennessee, the sales tax deduction is pretty important to us, and that has not been extended … yet,” he said in early November, adding the extender could be approved before the end of the year. “It’s also important to Florida and any state that doesn’t have a state income tax,” he continued.
In addition to the sales tax deduction, Jones said accountants had their collective eyes on a number of other extenders included in separate U.S. Senate and House bills. The general consensus was that no decision on the fate of these extenders would be made until after the November elections. This year, all 435 seats in the House of Representatives and one-third of the seats in the Senate were in play.
Jones said most physician practices still operate on a cash basis and are still making a profit. To avoid higher corporate tax rates, it’s quite common to distribute ‘leftover’ cash to partner physicians in the form of a bonus where it will be taxed at the individual rate.
“There is one deduction they can accrue and pay later, and that’s retirement plans,” Jones noted. “You get a deduction for the money that goes into retirement plans. Then you don’t have to pay taxes on any of that until you do pull it out … and hopefully, by then, you’re in a lower tax bracket.”
For those who wish to take advantage of the tax benefits that come with funding a retirement plan, Jones said there are several options. The easiest is to put money in a traditional or Roth IRA, but that limits an individual to $5,500 for the year ($6,500 for those aged 50 or older).
“If they want to save more, they need to look at another type of retirement plan where they can put away up to about $55,000 depending on the vehicle,” he said. Jones continued, “It’s too late to put a 401K plan in place for ’14, but if they don’t already have one, they (physician practices) should definitely think about it in 2015.
Section 179 Depreciation
“In the past several years, a business could expense up to $500,000 of new, fixed asset purchases during the year,” Jones said. On top of that, he continued, “They could also expense 50 percent of new equipment purchases … a 50 percent bonus depreciation.”
That, however, has changed dramatically. “In 2014, that $500,000 limit dropped to $25,000, and that 50 percent bonus depreciation is not in effect either at this time,” Jones said, adding the bonus depreciation extender could well be reinstated when Congress reconvenes after the elections. “We hope they’ll reinstate it, but we don’t know for sure.”
Jones went on to explain what the limit changes might look like for a physician practice. Using a hypothetical example, he said if a physician had a net income of $450,000 in 2013 and purchased a piece of equipment with a price tag of $400,000, the doctor could effectively drop his or her net income to $50,000. Then, using the bonus depreciation rules, that remaining $50,000 could also be expensed out to pull the taxable amount down to zero.
“But in 2014, in that same scenario of $450,000 net income, you could only take $25,000 plus regular depreciation off the top,” Jones said, adding the tax burden would be much higher this year. (Note, there are also rules that come into play pertaining to annual dollar thresholds that are not included in this simplified example). If the bonus depreciation extender is ultimately put back in play, then the physician could deduct another $200,000 tied to the new equipment purchase plus normal deprecation and the $25,000 covered under 179 depreciation.
Although, the latter scenario is clearly preferable, Jones pointed out that with or without the bonus depreciation, physicians should expect to pay more in taxes for 2014 than would have occurred under the much more generous 2013 rules. For those who have purchased new equipment this year or are planning to do so by Dec. 31, it will be particularly important to follow any last minute changes to the bonus depreciation extender.
As for the bottom line, Jones noted, “In 2013, there were so many changes. In 2014, there hasn’t been quite as much. It’s pretty much more of the same.”
Jones is based in the Jackson, Tenn. office of HORNE, one of the top 50 accounting and business advisory firms in the country with offices in Alabama, Louisiana, Mississippi, Tennessee and Texas.
By Cindy Sanders