Tax refund deadline looming for money-losing practices

Practices that lost money in 2008 after having previously been profitable can lessen their tax burdens through this one-time offer.

By Victoria Stagg Elliott — Posted Aug. 31, 2009

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A temporary Internal Revenue Service rule change made under the American Recovery and Reinvestment Act of 2009 may help medical practices -- but physicians will have to act quickly to get it.

The change, which is for this year only, allows small businesses, including physician practices, to carry any net operating loss from 2008 back as far as to 2003, as long as the business was profitable in previous years. Normally losses can only be taken back for two years. The deadline to take advantage of the rule change, however, is soon. Individuals have until Oct. 15. Corporations have until Sept. 15.

"The most important message is to ask the tax preparer whether they qualify. Make sure that they are aware of this provision," said Eric Smith, IRS spokesman.

Accountants say this change applies only to approximately 15% to 20% of medical practices because so many are run as personal service corporations that pay out any money gained in salaries. Most practice accounts are zeroed out by the end of the year. But for those that do qualify because money is held by the business, the financial gain can be significant.

For example, Tony Davis, a certified public accountant and principal at LarsonAllen Health Care Group in Minneapolis, said he helped a five-physician practice receive a refund of around $10,000. The practice lost money in 2008 because payments had declined and money had already been committed for salaries and various technological improvements.

"They really didn't have a lot of flexibility," Davis said.

The practice has since changed contracts with physicians to tie compensation more closely to the financial health of the practice, but in 2008, before it made that change, the practice lost approximately $100,000. Because of the expanded carryback option and the fact that the practice had made a profit in the previous five years, they were able to get a refund of approximately $10,000 of the federal tax paid on the prior year's profits.

"2008 was not a great year," said Davis. "But we were able to recover that federal tax that they paid."

Qualifying small business include those that averaged no more than $15 million in gross receipts for the three years prior to having a net operating loss. The loss can be carried back three, four or five years. Individuals need to file IRS form 1045. Corporations should use form 1139. Refunds will be processed within 45 days.

Changes to the carryback period have been made in prior economic downturns.

If practices miss the Oct. 15 deadline for individuals or the Sept. 15 deadline for corporations, it doesn't mean the money is lost. Rather, refunds can be claimed by carrying a business loss forward for up to 20 years. The advantage of the current rule change is that a refund can be received now rather than several years down the line.

Another program, also resulting from the Recovery and Reinvestment Act, may help medical practices pay down debt.

America's Recovery Capital Loan Program run by the Small Business Administration, guarantees loans up to $35,000 made by participating lenders. The loans can be used by established small businesses that have been profitable for at least one of the past two years to pay principal and interest on existing loans.

There are no application fees, and money is dispersed over a six-month period after the loan has been approved. Payment of the principal is deferred for one year. The loans are interest-free to the borrower, who can take up to five years to pay them back.

Bank participation in this program, however, has been low. There have been complaints that too much administration is required for relatively small, risky loans. This in turn has led to complaints from businesses that finding an institution that will lend money through this program is difficult.

According to the SBA, about 470 participating banks and other lending institutions have made 1,375 loans totaling $44.8 million The totals are lower than for other SBA programs.

"It is a new product. People are not used to it yet," said Mike Stamler, SBA spokesman.

The program has been funded to allow for $350 million in loans. Applications can be made until Sept. 30, 2010, or until funds are exhausted, whichever comes first.

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External links

Internal Revenue Service on special refund claims for small businesses (link)

Small Business Administration, ARC Loan Program (link)

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