Changes in tax laws could affect 2004 filing

The decaying leaves, brisk temperatures and shorter days means that a dreaded time of year is just around the corner: tax season.

But this upcoming tax season could prove to be milder than others, thanks to key changes in the law that could be a boon to some physicians.

Rules governing deductions for office equipment, structural improvements to rented office space and some business vehicles have been tweaked, among others. Advisers say taxpayers should consider those changes now -- before the tax year is over -- because they might affect financial decisions.

Some of the relief comes courtesy of the American Jobs Creation Act. The bill closed some tax loopholes but also offered many tax breaks.

In a news release, the American Medical Association expressed its particular support for provisions like the buyout -- done at no expense to taxpayers -- of tobacco farmers to diversify into other crops, although it was disappointed that the bill didn't include FDA regluation of tobacco.

The AMA also expressed its support for a provision that physicians who serve underrepresented communities through the National Health Service Corps would receive tax relief on government payments toward medical student loans. And in the same release, it praised the bill for adding sickle cell treatment to the Medicaid program.

President Bush signed the American Jobs Creation Act into law Oct. 22.

The bill also had provisions affecting physicians in their roles as small business owners. One was the extension of the so-called Section 179 rule, an expense deduction for equipment and computer purchases that was first signed into law in 2003. The deduction was set to expire at the end of 2005 but will be extended to the end of 2007, said Martha Bethea, a certified public accountant and director of CBIZ Accounting, Tax & Advisory Services of Northeast Ohio.

"In terms of making investments in computer equipment and that type of stuff, this means it's a great time to do it," Bethea said.

But there are some caveats to the deduction. D. Craig Godfrey, a certified public accountant and tax partner with Plante & Moran PLLC in East Lansing, Mich., said the deduction is allowed for only certain qualified purchases such as computers or phone equipment. Also, he said, a medical practice must have income to take the deduction, meaning a loss cannot be created by using it.

Another rule stemming from the new law could affect medical practices that are planning to remodel their office space. Under the old rules, structural improvements to rented office properties could be written off on a straight-line basis over 39 years, Bethea said. The new law allows that write-off to speed up to 15 years.

The act also could affect a physician's decision to buy a new sport-utility vehicle for use by the practice.

Melissa Pitchford, a certified public accountant with KAWG&F in Baltimore, said the new law places a $25,000 limit on the deduction allowed for business vehicles weighing 6,000 pounds or more. Previously the deduction allowed was up to $100,000.

Pitchford said the rule could have a particular impact on her clients. "We found that a lot of doctors have been purchasing these SUVs in the last few years for business purposes."

Deducting sales tax

Godfrey said the law also could affect physicians living in states where there is no state income tax. That's because it includes a provision that allows taxpayers, in 2004 and 2005, to choose either state income tax or state sales tax as an itemized deduction on federal tax returns.

In most states, income tax would be a greater figure than sales tax. But analysts say the new law will allow residents of Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming to get potentially thousands of dollars in tax savings they might not have otherwise gotten.

Another bill, the Working Families Tax Relief Act of 2004, signed into law Oct. 4, could affect some physician taxpayers by extending certain credits that had been due to expire. Among other provisions, Godfrey said, it includes extensions to the child tax credit and credits for employing welfare recipients and individuals from other target groups.

Outside of the new laws, some old ones are set to expire at the end of 2004, including the so-called bonus depreciation rule that helps relieve taxes on some big-ticket purchases. It is used for assets with long-term value that depreciate over time, such as computers. Pitchford said the rule allows taxpayers to deduct 50% of the value of the asset right off the top. But this relief soon will be gone.

For physicians considering buying office equipment in the near future, Pitchford said that could affect how quickly they should act. "If they were planning on buying some equipment at the beginning of next year, we advise them if they have the cash flow now to go ahead and purchase now," she said.

Even though many areas of tax law have remained the same, advisers say taxpayers should use the end of the year as a time to re-examine whether their finances are set up in the most tax-advantaged way.

For example, some people may have unwittingly become eligible for a different type of retirement plan, said John E. Sestina, president of the financial planning firm John E. Sestina & Co. in Columbus, Ohio.

"Make sure you are maximizing all of your retirement plan contributions, and make sure you have set up any retirement plans to which you are entitled," he said.

Sestina said the end of the year is also a good time for a medical practice to consider how it is structured as a business entity and whether it would be better suited as an S corporation or limited liability company, or another configuration. After all, Pitchford said, those changes must be made at the beginning of the year.

Several advisers stressed the importance of taxpayers getting their finances in order at the end of the year, before the period expires and they are locked into the tax consequences of what they had or did in 2004.

That way, there won't be big surprises when the leaves come out at filing time in April.