The medical environment today is extremely challenging. Regulatory requirements continue to increase, COVID-19 has lowered revenues and greatly increased the complexity of simply “staying in business,” and income tax laws remain complicated. Regarding the latter, the highest tax brackets remain challenging, especially when coupled with state income tax. Given the incredible government relief spending in 2020, it is likely that income tax rates will only increase from here.

The Treatment Plan

• Deduct all business expenses to which you are entitled. The most efficient way to take these deductions is to pay them through entities in which you have ownership – or in which you can influence payments in lieu of wages. Opportunities include automobile expenses (under an “accountable plan”), home office reimbursement, meetings in your home (under Code Section 280(a)), marketing efforts and business-related travel.
• Involve family members in a comprehensive family tax plan. It is common and appropriate to hire family members, who have lower tax brackets than the physician, in the physician’s medical practice or in outside entities they control. Legitimate duties have to be performed; however, whatever can be shifted to others will reduce the overall family income tax burden. Likewise, transferring ownership of assets producing taxable income can also help reduce the overall family income tax burden.
• Properly structure your entity. An analysis should be done by an income tax advisor regarding the entity in which you practice and any other entities that may be appropriate. In larger groups, it is common for each physician to have their own company through which they receive medical practice earnings and all other outside income. These “Subset Entities” can then take advantage of income tax deductions as shown above, along with paying appropriate, but minimal, salary in order to reduce the burden of Social Security and Medicare tax (collectively called Self-Employment Tax).
• Retirement plan contributions. There are a number of retirement plans that may be appropriate for neurosurgeons. These are typically sponsored by the practice and can allow a deduction for retirement plan contributions, which save the physician the amount of the deduction times their marginal tax bracket (federal and state). In particular, cash balance plans and defined benefit plans often times allow substantial contributions/deductions.
• Match deductions with cash outflow. While equipment and furniture can be deducted in the year of acquisition, up to the substantial limits under Code Section 179, physicians are often best-served to have their depreciation deductions match cash outflow. If physicians are buying equipment and furniture with current year cash, then taking the Section 179 deduction in the year of acquisition makes sense. If they are financing the equipment and furniture over several years, the physicians are often best-served to amortize the deduction over several years as well.

Of all the tax strategies outlined above, proper structure is probably the most important, followed by identifying business expenses that can be deducted.

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The Treatment Plan above can greatly reduce the individual income tax burden for each neurosurgeon who applies it to their professional and personal financial situation. If tax rates increase, the Treatment Plan becomes even more valuable.

Q&A with William D. King, CPA, CHBC

What are the most common tax-related mistakes you see from physicians?

Through 30 years of serving physicians, the most common mistake I’ve seen time and again relates to incorrect legal and tax structures, both for a practice’s full scope of activities and its individual owners/providers. An incorrect or incomplete structure not only leaves more assets and activity exposed to liability, but it also restricts the ability to fully use the various provisions of the tax code to maximize net take home pay.

How are tax laws changing and what can neurosurgeons do to reduce their tax liabilities?

2017’s Tax Cuts and Jobs Act (TCJA) was the most significant and comprehensive tax reform bill since the 1970s. 2020 and the various COVID-19 related relief programs and legislation have likewise provided new avenues to minimize tax burdens, whether it be through changes to Net Operating Loss treatment or the ability to access retirement funds without early withdrawal penalties under certain circumstances. Obviously, the results of this year’s election – not only at the top with the Presidential race but, perhaps more importantly, at the congressional level will determine how significant tax reforms may be in the coming years.

What advice do you have for new neurosurgeons who are just starting out in private practice?

Whether it be ABA or not, it is vitally important for new neurosurgeon practice owners to identify, interview and select their accountants, attorneys, business advisors and the like that comprise their management partners. By putting the right partners in place from the beginning, you’re more likely to set yourself and your practice up for success from Day 1 – and the compounding effect of getting it right early will save you tremendous amounts of money and headaches over the long run, while allowing the provider to focus their energies on what they do best and love.

What are the most important factors to look at when deciding whether to work with a tax professional?

Tax professionals should not only have the ability to craft a custom plan for your business and family, but they should also be proactive in apprising you of any new tax codes and strategies, while being prospective in their planning.

Is there one tax reduction strategy that most neurosurgeons would most benefit from?

Every neurosurgeon’s life, both personally and professionally, will be slightly different and there’s no one ‘golden goose’ strategy that uniformly applies to all or should take precedent over other considerations. The best tax reduction strategy that most neurosurgeons would benefit from would be to find a tax advisor to comprehensively review where you’ve been, where you’re at and where you wish to find yourself in three, five, 10, 20 years down the road – and to craft an individualized plan to take full advantage of the tax code to help you get there.