By: Chris J. Roe, CPA/PFS
As a self-employed physician, there are a number of valuable tax savings opportunities you may be missing. From conducting business from your home to claiming business travel expenses, here are five 2020 tax deductions to consider.
Deduction #1: Home Office
One of the most utilized deductions of self-employment can also be one of the more complex, scrutinized deductions. Whether you rent or own your regularly used home office, you may deduct it as a home office expense. While you are more or less on the honor system, you should always be prepared to provide proof of your deduction in the event of an audit. In order to deduct a home office, it must be used regularly and exclusively for your business and it must be your principal place of business.
Additionally, the expenses associated with your mortgage or rent, utilities costs and insurance can be deducted for the use of your home office. For example, If your home office occupies 10 percent of your home; then, 10 percent of your annual electricity bill and homeowner's insurance is tax deductible.1 Keep in mind that some of these deductions apply only to homeowners rather than those who rent their home office space.
If you’re someone who works from home or uses part of it for your business, a few key deductions could catch you a cost break in the long run.
Deduction #2: Health Insurance
As someone who is self-employed, you more than likely pay for your own health insurance (unless you are eligible to participate in a spouse’s employee plan). As such, you are able to deduct your health, dental and qualified long-term care insurance premiums. You are also able to deduct medical and dental insurance for your spouse, your dependents and children younger than 27 at the end of the year.2 To accurately calculate your deduction and gain further insight, use the IRS Publication 535.
Keep in mind that as an adjustment to income as opposed to an itemized deduction, you don’t necessarily need to itemize in order to claim. It’s important to note that if you are eligible to enroll in a spouse’s employee plan and choose not to for any reason, you are still able to claim the deduction.
Deduction #3: Continuing Medical Education
If you plan on deducting any expenses related to education, they must be related to maintaining or improving your knowledge and skills associated with medicine and your current role (this means if you’re interested in learning a new role or another profession, the associated classes or coursework won’t be deductible). If you are furthering your education with coursework related to your industry, then items such as tuition, supplies, lab fees and other related expenses may be deductible. Requirements can be reviewed using the IRS website at www.irs.gov.
Deduction #4: Business Travel
In order for business travel to qualify as a tax deduction, it must be longer than an ordinary workday, take place away from the general area of your home and require you to sleep or rest. Furthermore, you must engage in business activity during such a trip in order for it to be considered business-related. Whether you’re traveling as part of your medical role or gaining insight or skills related to medicine, the travel must be associated in some way.3 It’s important to hold on to receipts and records during these trips as the IRS often keeps a close eye on this form of deduction.
Some of the expenses that may be considered deductible during travel include the transportation costs (such as airfare or car rental), lodging and associated meals. While you don’t need to book the cheapest options, you won’t be able to deduct outlandish expenses. As with any trip, it’s important to keep your costs reasonable as you are the one paying the majority of them.
Business travel often takes a toll but being able to deduct 100 percent of your business travel expenses (except for meals, which are limited to 50 percent) can help make the effort less stressful.3
Deduction #5: Retirement Contributions
When it comes to retirement, you have many options as a self-employed physician. Each option has its pros and cons and comes with varying rules. There is no one size fits all. But, a commonly implemented plan is a Solo 401(k) Plan.
As an independent medical professional, you can contribute to a solo 401(k) plan of up to $57,000 in 2020 ($63,500 if you’re 50 or older) or 100 percent of your earned income, whichever is less. Similar to a standard, employer-sponsored 401(k), your contributions are pre-tax or Roth and distributions after age 59½ are taxed or tax-free if a Roth.4 In addition to your solo 401(k) plan, you may implement a second retirement plan called a "Cash Balance Plan". The Cash Balance Plan gives you the potential to put hundreds of thousands of dollars away each year, pre-tax. Most physicians overlook implementing a cash balance plan.
The specific retirement plan that is right for you will depend on how much you are able to contribute each year and the structure of your practice.
The Bottom Line
While most self-employed or small business tax deductions are complicated, being aware of these basics can help ensure you don't leave any valuable deductions on the table. By keeping in mind whether an expense is necessary to your business operations you’ll be on the same page as the IRS as they examine your deductions. If you’re ever unsure of an expense and it’s deduction capabilities, or if you simply want a tax strategy to optimize your earnings, schedule a meeting with us and we will guide.
2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Twenty over Ten and Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal, financial or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any financial advice or investment security.