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We are NOT affiliated with the State of Maryland. If you are looking for information about Maryland income taxes, please go to www.marylandtaxes.com.


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Exchange Authority - New England's first authority for IRC 1031 Exchanges

Cost Segregation Studies - Accelerate tax depreciation deductions on new and existing buildings through cost segregation studies

Social Security - find out the latest rules or your projected retirement benefit.

The Company Corporation offers fast, reliable & affordable incorporation and LLC services.



MONTHLY TAX NEWSLETTER

March 2012

ENTITY SELECTION FOR YOUR PRACTICE

by Andrew D. Schwartz, CPA

When you set up your practice, you need to decide which type of entity to establish.  Whenever you have business partners, setting up a legal entity for your practice is a must.  While an entity won't generally protect you from your own malpractice, operating a practice as a Corporation or LLC will shield your assets from mistakes made by your business partners.  Another benefit of setting up an entity is to separate your practice from your personal finances. 

Currently, here are the most commonly used entities to choose from:

  • S-Corporation

  • C-Corporation

  • Limited Liability Company

  • Sole Proprietorship

There are pros and cons to each type entity.  For C-Corps, there are a variety of limitations and pitfalls including:

  • During the early years when your practice might be generating losses

  • In each subsequent year when they your practice is hopefully generating profits

  • And then when your practice is sold

Due to these pitfalls, we don't see many small healthcare professionals that choose to run their practices as a C-Corp.  For that reason, let's focus on the other three entity options: sole proprietors, S-Corps, and LLCs.

Please note that like most of the tax rules, the C-Corp issue is not completely black and white.  Some healthcare professionals do opt for a C-Corp to be able to deduct their disability insurance premiums and their family's health expenses through a Health Reimbursement Arrangement; as well as to participate in certain pre-tax benefits not available to sole proprietors and owners of S-Corps and LLCs.  These professionals need to be very careful to navigate around these pitfalls, however, to avoid paying excess taxes.

What are the comparative advantages of a Sole Proprietor vs an LLC vs an S Corporation?

Let’s start with a sole proprietor. A sole proprietor is not a separate legal entity and is not a separate taxable entity. Basically, it’s you, and you report the income and expenses from your practice to the IRS on a Schedule C attached to your federal tax return.

An S-Corporation, on the other hand, is a separate legal entity and files its own tax return, an 1120S. The S-corporation doesn’t pay its own taxes, however. Any income or allowable loss from the S-Corporation will flow through to your personal tax return and will be reported to you on a Schedule K-1.

An LLC is sort of a hybrid of a sole proprietor and an S-Corp. An LLC is a separate legal entity. If the LLC has only one owner, however, the LLC defaults to be treated as a "disregarded entity" for tax purposes, and you’ll report the income or expenses on a Schedule C attached to your tax return, just like you would as a sole proprietor.

Type of Entity Separate
Legal
Entity
Files Own Tax
Return
Sole Proprietor No No
Single Member LLC Yes No
S-Corporation Yes Yes

An LLC with multiple owners would be treated as a partnership for tax purposes, and would therefore need to file a partnership tax return (Form 1065) each year.

Which type entity makes the most sense? It is usually easier for sole proprietors and LLCs to deduct losses – especially in the early years of the practice. Sole proprietors and LLCs also have an easier time deducting personal-type expenses like automobile expenses and the home office deduction.

S-Corps, on the other hand, can help their shareholders save taxes once the practice becomes successful by letting them avoid paying Social Security and Medicare taxes on money paid out as “S-Corp Distributions”.  Plus, by paying yourself a salary through the practice's payroll along with the other employees, you can avoid the headaches associated with remitting your personal income taxes through quarterly estimates.

Flexibility of an LLC:

One strategy we are seeing more often is for a person to open a practice as a Single Member LLC, and maintain their practice as an LLC until it makes sense to be treated as an S-Corp. At that time, the LLC will file a Form 8832 with the IRS to elect to have the LLC treated as a corporation, and then will elect S-Status by filing a Form 2553

One huge benefit of this strategy is that you do not need to get a new Employer Identification Number for your practice if you decide to switch  from being taxed as a Sole Proprietor to an S-Corporation.  This will also allow you to continue to use the same NPI and avoid being required to re-credential with all the insurance companies.

To Incorporate or Not To Incorporate?

There are certain instances when incorporating your practice will most likely not make sense, and a Single LLC would be the preferable entity to select.   We wrote about this in our July 2005 Newsletter in an article titled: To Incorporate or Not to Incorporate.  Basically, if you earn a good salary each year, and then earn some extra money on the side by moonlighting or consulting, incorporating that practice might cost you a lot in extra taxes, state fees, and professional fees.

Which is Best for You?

Most of the practice clients we work with these days set up either an S-Corp or an LLC. There are pros and cons of each type entity, so you want to review your specific situation with your CPA and your lawyer to make sure you set up the correct entity based on the current set of facts and circumstances.

TOP


HAVE YOUR WORKING CHILDREN CLAIM "EXEMPT" ON THEIR W-4 FORMS

by Andrew D. Schwartz, CPA

I graduated from Wharton in 1987.  For those of you keeping score at home, that means I've been working at my practice for a score and a quarter.  Now that I've been practicing for twenty-five years, many of the clients I picked up earlier in my career have children in high school or college who have part-time jobs.

So far this tax season, I've noticed that most of these kids who work are incorrectly having federal and state income taxes withheld from their wages.  Please note that a working child will generally owe no income taxes unless wages earned exceed $5,950 (in 2012) and/or investment income exceeds $300.  Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.

The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won't earn enough to be taxed.  All you need to do is have your child write the word "Exempt" in Box 7 of the Form W-4 that is generally completed the first day of employment.  If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.

Here is what the IRS says in their instructions to the Form W-4:

Exemption from withholding. If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2012 expires
February 18, 2013. See Pub. 505, Tax Withholding and Estimated Tax.

And here are the instructions on the W-4 for line 7:

I claim exemption from withholding for 2012, and I certify that I meet both of the following conditions for exemption.

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you meet both conditions, write “Exempt” here .

Do yourself and your kids a favor by having him or her write the word "Exempt" on Line 7 of the W-4 form.  Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages.  And you won't get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund.

 TOP


A.M.T. ONCE AGAIN SPELLS TROUBLE FOR MILLIONS OF TAXPAYERS

by Andrew D. Schwartz, CPA

Here we go again.  On New Year's Day 2012, the Alternative Minimum Tax (AMT) went from bad to worse.   Due to a stop-gap provision that expired at the end of 2011, many more people could end up paying a lot more AMT this year.  Experts predict that the number of people being hit by the AMT is on track to jump six-fold to 30 million taxpayers in 2012.

What is the AMT?  When you calculate your taxes, you're supposed to calculate them two ways.  First, you figure your tax liability under the regular tax system.  And then you re-calculate your taxes using the AMT rules.   Whichever tax is higher is the one that you pay.

When calculating the AMT, certain tax breaks aren't allowable, including your personal exemptions and your standard deduction if you don't itemize.  Itemizers are required to back out their state income taxes, real estate taxes, a portion of allowable medical expenses, all miscellaneous itemized deductions, and interest paid on home equity debt not used to purchase or improve a principal residence or second home.  Anyone who realizes significant capital gains or exercises and holds Incentive Stock Options (ISO's) generally ends up paying the AMT as well.

A great article about the AMT was posted on abcnews.com on February 9th.  Check out: Income Taxes: 30 Million May Be Hit by AMT This Year by Alan Farnham.  (Yes, I am the Andrew Schwartz quoted throughout this article, so please let me apologize up front for this shameless bit of self-promotion.  However, the article is an excellent analysis of the current AMT mess we're dealing with as part of the overly complex US Tax Code.)

There Is Hope

So the big question is whether Congress will implement another AMT Patch before it's too late.  When you factor in that this year is an election year, I am optimistic that either this Congress or the next Congress will do something about the current AMT crisis.  With Congress and the President getting sworn in during January 2013, they will definitely get off to an extremely rocky start if 30 million taxpayers owe thousands of dollars in additional taxes due to their failure to enact an AMT patch as has been done many times during the past decade.

TOP


TAX AND FINANCIAL PLANNING CALENDAR FOR MARCH 2012

Month

Income Taxes

Saving and Investing

 

March

  • To have your returns completed by 4/15, please get your information to one of the MDTAXES CPAs during March
  • Use your tax refund to pay off some debts, fund an IRA, and/or invest.

 TOP


2011 & 2012 TAX FACTS

  • For 2011, the standard deduction for a single individual is $5,800 and for a married couple is $11,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2011, the personal exemption is $3,700. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $110,100 for 2012, up from $106,800 for 2011.
  • The standard mileage rate is $.555 per business mile as of July 1, 2011, up from $.51 per mile for the first six months of 2011.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $17,000 in 2012, up from $16,500 in 2011.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2011 and 2012.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2012 to make your 2011 IRA contributions. 

TOP

Need Help With Your Nanny Payroll?
 

This Month's Topics

Entity Selection for Your Practice

Have Your Working Children Claim "Exempt" On Their W-4 Forms

A.M.T. Once Again Spells Trouble For Millions of Taxpayers

The FICA Refund for Medical Residents 

2011 & 2012 Tax Facts

Tax and Financial Planning Calendar for March 2012

 

NEWSLETTER ARCHIVES
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WHAT'S NEW WITH THE FICA REFUND?

In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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