How the New Tax Code Impacts Therapists and their Tax Deductions

New Tax Code, Now What?

As if taxes were not already overwhelming enough, they just got just a little bit more confusing this year. As you probably know, a new tax code was passed in December, the 2017 Tax Cuts and Jobs Act. This new tax code is raising a lot of questions and comments from therapists to accountants alike.

It is important to note here that neither the IRS nor most accountants have a full understanding of what this new tax code entails–it is an extremely complex piece of legislation. The IRS will continue to release new information regarding the tax code over the next few months.

In the meantime, we’re breaking down the parts of the tax code that we know impact therapists and private practice owners and answering some of the questions you’re probably wondering about right now.

As you read through this post, please keep in mind that we are not tax experts and this material is only informational in nature–it should not be taken as legal or expert advice. Please refer to your accountant for any legal or tax questions you may have.

Therapists and the New Tax Code

You may be asking yourself: does the new tax code impact me? The short answer is most likely. The longer answer, however, is that though it may impact you, figuring out how it impacts you, and to what degree, is a lot more difficult.

At this point, you’ve probably heard a lot about the 20% deduction, the C-corp tax break, and the various musings around what are pass-through businesses and whether your private practice counts as one. We’re going to parse through these issues given the information available to us right now. Remember, this is not tax advice, rather this post is designed to provide you with foundational information you need to dive into the new tax code and to ask your accountant the right questions.  

Private Practice Business Entities

Businesses operate using the following 4 categories:

  • C corporations
  • Sole proprietorships
  • S corporations
  • Partnerships

These entities are significant to the IRS because of the way they are taxed. C corporations are subject to double taxation–meaning they are taxed twice. They are taxed once at the business level and once on the personal level when the corporation distributes income to shareholders.

Unlike C corporations, the three other types of business entities all offer a single level of taxation. Meaning these businesses are not taxed at the business level, but rather the income is passed on to owners and only taxed at an individual level. Thus, these type of business entities are what we call “pass-through” businesses because they pass profits onto their owners, who then pay taxes on them.

Private practices, especially for solo therapists, tend to fall into the latter classification of business entities and therefore are categorized as “pass-through” businesses. Practices tend to be Sole proprietorships (including sole-member LLCs or PLLCs where one does not elect to have them treated by the IRS as an S corporation), S corporations (including sole-member LLCs or PLLCs where one has made the election to have them treated by the IRS as an S corporation), and finally Partnerships (including multi-member LLCs and PLLCs).

You may be wondering now, why does all this matter? Under the new tax law, there is a 20% deduction on qualified business income (QBI) for pass-through businesses. Before you get too excited, however, there are some caveats that are important to note here–some pass-through businesses will not be able to take this deduction. “Specified service” trades or businesses are not eligible for this deduction. Defining which businesses fall into the “specified service” category is a bit tricky and will continue to be a topic of conversation, definition, and regulation by the IRS over the next couple of months (or even years).

Nonetheless, at the moment most individuals agree that private practice therapy offices are likely going to be defined as specified service businesses. Now you may be asking yourself, does that mean I am not eligible for the 20% deduction as a therapist or private practice owner? And the answer is yes or no, it really depends. We know this is all very confusing, but tax law may just, in fact, be more confusing than medicare billing (who thought that was even possible?).

As a therapist, you can still claim the 20% deduction even if you own a private therapy practice if your taxable income is less than $315,000 (if you’re married and filing your taxes jointly) or $157,500 (if filing individually). Even if you make more than that, there is a phase-out scheme for the deduction until your taxable income hits $415,000 (joint filing) or $207,500 (individual filing). Therefore, there is still a good chance you’ll be able to take advantage of this new tax deduction-which is exciting news!

C Corporation’s 21% Tax Rate and What it Means For You

Another thing to note is that you’ve probably heard about the 21% tax rate for C corporations and may be thinking about switching your business entity. This option is likely a bad idea for most private practices because as we mentioned earlier, C corporations are subject to double taxation. So though your C corporation’s profits will initially only be taxed at 21% (while your current tax rate may seem higher), the remaining balance will also be taxed again when it is distributed to you and this balance will not be classified as qualified business income (QBI) and therefore will not be eligible for the 20% deduction. Thus it is likely a bad idea to switch your private practice business entity over to a C corporation from the tax perspective because you will almost always be paying more taxes. Nonetheless, now that you’re equipped with this knowledge, this is something you can discuss with your accountant or tax lawyer if you find necessary.   

Tax Deductions for Therapists

Most business deductions have not changed in the new tax code. Therapists are still able to deduct various business expenses on their Schedule C or their business tax returns (dependent on the type of business entity they are).

What’s Deductible?  

Tax-deductible expenses a therapist may have are as follows:

  • Book, magazines, reference material
  • Liability insurance
  • Licensure fees
  • Office equipment/furniture
  • Utility bills for office
  • Legal and professional fees
  • Memberships fees for professional organizations
  • Messengers, private mail carriers, postage
  • Office rent
  • Office supplies
  • Marketing/advertising expenses
  • EHR software (such as TheraNest)
  • Credit card processing fees
  • Health/Dental Insurance
  • Some travel expenses
  • Continuing professional education (books, online courses, conferences, etc.)

This is not an exhaustive list of expenses, but rather is a list designed to give you a general overview of the type of expenses that are tax-deductible for your private therapy practice. Always consult with your accountant before writing things off. The profit remaining after deducting business expenses is the profit that is available for the 20% deduction (if it is considered qualified business income (QBI) as defined above).

New Restrictions in Tax Deductible Expenses

Though many of the items that are tax-deductible for private practices did not change, the 2017 Tax Cuts and Jobs Act did put in some new restrictions on meals and entertainment expenses. Though holiday office parties will continue to be 100% tax-deductible, any other form of entertainment expenses are no longer tax-deductible (they used to be 50% deductible). This means you can no longer deduct the cost of taking a referral out the ballot or the ballgame. Business meals, however, will continue to be 50% deductible, so don’t fret about taking them out to dinner. When traveling, you can also still deduct the cost of meals.

Year-Round Tax Best Practices

Being ready for tax season doesn’t mean reading up on taxes once a year, rather to be prepared you have to employ good tax habits all year long. Here is a list of best practices you should be doing year-round to make sure you’re always prepared when you’re dealing with the IRS. Even as tax codes change, employing these habits will make sure you’re prepared for whatever gets thrown at you.

1.  Always Keep Your Receipts

This one is a no brainer, your clinical documentation is not the only thing you have to make sure to keep track of. If you want to claim any business deductions at the end of the year, you have to have proper documentation of your expenses. Make sure you keep track of all of your receipts so you can be prepared for tax season (and a potential IRS audit).

2. Find a Good Accountant

Finding a good accountant is hard, but having one is often very necessary. Since many therapists are often self-employed, finding a person you can trust is integral to building a strong practice that will continue to grow year after year.

3. File Your Taxes Quarterly

If you expect to owe more than $1,000 in annual taxes, make sure you are submitting quarterly tax payments–it is required. Typically when you prepare your tax return in the Spring, you’ll receive vouchers to make quarterly payments for the coming year. Having a good accountant can also help you navigate issues such as these.

4. Keep Your Tax Information

Going back to the dreaded audit scenario, make sure to keep all of your tax information. The IRS website states that you should keep all tax information for four years from the time it was received or paid (whichever is later). We think this is good advice to follow.

Moving Forward

As the 2017 Tax Cuts and Jobs Act continues to go into full effect this year, you’ll likely be faced with many questions regarding the financial outlook of your private practice. We hope this post gives you the foundational knowledge you need to be able to ask your tax professionals the right questions. Being informed about the different aspects of your private practice ensures that you are creating a business set up for long term success.

Additional Resources

Before you go, check out these related posts: