The term “subluxation” is used by chiropractic doctors to depict the altered position of the vertebra and subsequent functional loss, which determines the location for chiropractors to perform a spinal adjustment.
You make choices about your tax bill every day. Are you making the right choices, or are you leaving money on the table?
When a person has a subluxation of the spine, it has caused functional loss and pain. When working with chiropractors and their taxes, we look at “tax subluxations” as the lack of effective tax planning, which creates financial loss and pain with an unnecessary overpayment of taxes.
During this process, we ask the following questions:
- Are you satisfied with the taxes you pay?
- Are you confident you are taking advantage of every available break?
- Is your tax advisor giving you proactive advice to save on taxes?
If you are like most chiropractors and small business owners I work with, your answers are “no,” “no,” and “huh?”
And if that’s the case, I have bad news and good news.
The bad news is you’re right! You may pay too in much taxes — maybe tens of thousands more per year than the law requires. You are almost certainly not taking advantage of every tax break that you can.
Many tax advisors aren’t proactive when it comes to saving their clients money; they put the “right” numbers in the “right” boxes on the “right” forms, and file them by the “right” deadlines — end of story. They do a fine job recording history, but wouldn’t you prefer someone to help you write history?
The good news is you don’t have to feel that way! You just need to develop a better plan, both legally and ethically. You’ve already taken a giant step in that direction, whether you realize it or not. For example, did you know owning your own practice is the biggest tax shelter left in America?
You make choices about your tax bill every day. Are you making the right choices, or are you leaving money on the table? Here are the top three “tax subluxations” I’ve seen with chiropractors and small business owners.
1. Failing to Plan
It doesn’t matter how good you and your tax preparer are with a stack of receipts on April 15. If you don’t know you can write off your kid’s braces as a practice expense, you’re paying more taxes than you need to pay.
Tax planning gives chiropractors two powerful benefits you can’t get anywhere. It’s the key to your financial defense. As a practice owner, you have two ways to put cash in your pocket. There is financial offense, which means making more. And there is financial defense, which means spending less. Spending less is easier than making more.
First, taxes are your biggest expense; it makes sense to focus your financial defense where you spend the most. Sure, you can save 15% on car insurance by switching to GEICO, but how much will that really save you in the long run?
Second, tax planning guarantees results. You can spend all sorts of time, effort, and money promoting your practice — and that still won’t guarantee results. Or you can set up a medical expense reimbursement plan, deduct the cost of your teenage daughter’s braces, and guarantee savings — but remember, these results start with planning. You can’t deduct money you spend on a medical expense reimbursement plan if you don’t set it up first.
2. Audit Paranoia
I’ve worked with so many chiropractors who fear, rather than respect, the IRS. They’re often afraid to take deductions they’re entitled to for fear of raising the proverbial red flag.
You shouldn’t be afraid to take a legitimate deduction. If your tax professional recommends you shy away from taking advantage of a strategy you think you deserve, ask them to explain why. Don’t be satisfied with a vague reply that it will “raise a red flag.”
Remember, it’s your money on the table, not theirs.
3. Wrong Business Entity
The next mistake is choosing the wrong business entity or not having multiple entities.
Many chiropractors start as sole proprietors and, as they grow, establish an LLC to help protect from practice liability. Choosing the right practice entity involves all sorts of tax considerations as well. Many chiropractors are operating with entities that may have been appropriate when they were established, but not so much now.
There are a few ways you can organize your business:
- A proprietorship: a practice you operate yourself, in your own name or trade name, with no partners or formal entity.
- A partnership: an association of two or more partners.
- A C corporation: a separate legal “person” organized under state law.
- An S corporation: a corporation that elects not to pay tax itself. Instead, it files an informational return and passes income and losses through to shareholders according to their ownership.
- Finally, a limited liability company (LLC) or limited liability partnership (LLP): an association of one or more “members” organized under state law.
If you operate your practice as a sole proprietorship, or a single-member LLC taxed as a sole proprietorship, you may pay as much in self-employment tax as you do in income tax. If that’s the case, you might consider setting up an S corporation to reduce that tax.
If you’re taxed as a sole proprietor, you’ll report your net income on Schedule C. You’ll pay tax at whatever your personal rate is. But you’ll also pay self-employment tax of 15.3% on your first $127,200 of “net self-employment income” and 2.9% of anything above that. You’re also subject to a 0.9% Medicare surtax on anything above $200,000 if you’re single, $250,000 if you’re married filing jointly, or $125,000 if you’re married filing separately.
Now, you still must pay yourself a “reasonable compensation” for the service you provide as an employee – in other words, the salary you would have to pay to hire an employee to do the work for you. If you pay yourself nothing, or merely a token amount, the IRS can recharacterize up to all your income as wage and hit you with some very hefty taxes, interest, and penalties. So, don’t get greedy! But according to IRS data, the average S corporation pays out about 40% of its income in the form of salary and 60% in the form of distributions. So, you can see that there’s at least a possibility for real savings.
While reading this, you’ve probably found some things you aren’t doing as effectively as you could be. Maybe you’re operating your practice in the wrong entity or you probably haven’t done any real planning at all.
If that’s the case, isn’t it time to look at your taxes with new eyes and build a comprehensive plan that helps you accomplish your goals in the most tax-efficient way possible?
This content was brought to you by Impact PartnersVoice. Insurance licensed in North Carolina. The specialized information we provide regarding tax minimization planning is not intended to (and cannot) be used by anyone to avoid paying federal, state, or local municipalities taxes or penalties. You should seek advice based on your particular circumstances from an independent tax advisor as tax laws are subject to interpretation and legislative change and are unique to every specific taxpayer’s particular set of facts and circumstances. DT954365-0920