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How to get tax breaks for your medical practice

Federal, state and local governments offer doctors incentives because practices are recognized as economic engines. But physicians must know how and where to find them.

By — Posted Aug. 5, 2013

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Constructing a new medical facility or hiring new employees might seem like a daunting and expensive undertaking for many physicians. But those tasks could become a little more feasible if they take advantage of the many federal, state and local incentives available to help developers, including physicians, substantially reduce taxes and slash their building, equipment and hiring costs.

In some cases, getting financial help can be as easy as filling out a form and building in the right location. Obtaining other financial incentives, such as tax abatements from local communities, can be complicated and time-consuming, often requiring a lawyer or other adviser to help wade through the political and bureaucratic waters.

The trick is to know where to look, whom to talk to and when to act. Some programs have specific deadlines. Others have limited funding.

“Incentives are only granted as long as there's money for them,” said Carol Kokinis-Graves, a senior state tax analyst in the Chicago area. “You don't want to go through the process only to discover the money's gone.”

There was a time when few doctors thought to ask for incentives, and not many incentives were offered as municipalities looked primarily to lure manufacturing and high-tech companies.

Some local and state medical associations hoped to change that and conducted studies showing the economic impact private medical practices have on an area. A 2008 study by the Medical Assn. of Georgia, delivered to the state Legislature, found that practices accounted for more than 180,000 jobs, $10 billion in wages and nearly $20 billion in economic activity in the state that year. In addition, each private-practice physician in Georgia supported 13 additional jobs, $640,000 in wages for those jobs and almost $1.5 million in total economic activity.

“As we put this study forth to legislators, we said, 'Yes, doctors make communities healthy,' ” said Donald Palmisano Jr., CEO of the medical association. “But in some rural areas, they're also the largest employer.”

The study was used mostly as a tool to bring about reform at the state legislative level. But thanks in part to such studies, governments are recognizing physicians' economic benefits.

The right place to work

In some instances, medical practices can get state and federal incentives just by locating in certain areas and hiring certain people. Financing options vary from state to state, and some states are more receptive than others. Check your state's economic development department website for a list of available incentives, forms to fill out, and phone numbers and contacts to call to get them.

The first place to go if you're thinking about building in Illinois is the state's Dept. of Commerce and Economic Opportunity, said Mark Huddle, a Chicago attorney specializing in municipal and state government matters. (There are equivalent government agencies in other states.)

“It has a whole staff that can put together an economic package for you,” he said. “How many jobs are at stake? The more at stake, the more incentives the state will provide.”

Huddle said the state will reimburse employers half the cost to train employees and will give some businesses low-interest loans. Other incentives are available if you're in a designated Enterprise Zone for distressed areas, which he said aren't necessarily undesirable areas.

Other tax incentives vary by state. For example, Alabama has tax-exempt bonds to build medical practices that typically provide reduced interest rates on financing costs, lower sales taxes on construction materials and marked-down property taxes over the life of a loan for a limited number of years, said Gerard Kassouf, a certified public accountant in Birmingham. However, these bonds are geared for medium or large practices with a $2 million to $3 million project cost because of the price of putting the bond issue together. Bonds are subject to funds being available and the project being approved.

California has a slew of financing options available to all types of businesses, including for hiring people in an enterprise zone, locating in a brownfield or environmentally challenged area, and installing a solar or thermal energy system.

Many states provide tax credits for hiring unemployed or disadvantaged individuals, or just hiring more people.

Hiring a veteran can produce federal incentives. Through the Dept. of Veterans Affairs' Special Employer Incentive Program, a veteran who is facing extraordinary obstacles to employment is placed in on-the-job training or a work experience with an employer. The department can reimburse the employer up to 50% of the veteran's salary for up to six months. The employer also is eligible for a federal tax credit for hiring a veteran who participated in a vocational rehabilitation program.

There are many programs for doctors who want to practice in rural areas. Huddle said medical offices are especially desired in rural communities, and the U.S. Dept. of Agriculture has a loan program and grants for developments in these areas. Several states and the federal government have loan forgiveness programs for physicians who practice in designated rural or underserved areas for a specified period.

Texas has several programs, including the Physician Education Loan Repayment Program. Physicians who agree to practice for four years in primary-care health professional shortage areas can receive up to $160,000 to repay medical school loans. The 2013 legislative session appropriated $33.8 million for 2014-15, an increase of more than 500% above the $5.7 million in the 2012-13 budget. The PELRP website features a factsheet and application for enrollment.

Dale Quinney, executive director of the Alabama Rural Health Assn., said physicians who practice in rural areas can get a $5,000 tax credit per year for five years. Medical board scholarships, which will pay off school loan debt for as many students as possible, are available through the state Legislature. Physicians need to spend six years in areas with populations up to 50,000 to complete their obligation, with less time in smaller, more rural areas.

Abatements are available

Often, you won't have to venture farther than city hall to obtain an incentive package.

“We have to offer tax abatements,” said John Brezik, a councilman and plan commission president in Hobart, Ind. “It's the only way we can compete.”

Hobart recently offered a 10-year tax abatement, which features a graduated income tax scale over 10 years, to a physician who plans to build a $3 million multi-office facility that will be anchored by his expanding medical practice.

The physician first filled out a form with the city's Economic Development Dept., then went through the planning commission and city council for approval for both his plans and the abatement. The process took about a year.

Huddle said businesses in Will County, Ill., can get abatements of up to 50%, but they apply only to improvements made to the properties.

“Typically, they're just looking for improvements of any kind. They're happy you're investing money in their community,” he said.

Kansas physicians looking to build practices can apply for industrial revenue bonds in the city or county in which they're building, said Roger Hamm, deputy director of property valuation at the Kansas Dept. of Revenue. The bonds finance up to 100% of a practice's land, building and equipment and make the business eligible for a 100% property tax exemption for up to 10 years and a sales tax exemption for labor and materials purchased for the new facility.

Hamm said the bond is structured so either a city, county or the Kansas Development Finance Authority issues bonds to pay for a development. If the development is for a group of doctors, for instance, they would need to turn their building over to the entity that issued the bonds while they're getting the abatement. The lease rentals they pay to the entity are used to repay the bond with interest. The practice doesn't have to pay property taxes while paying back the bond. When the bond is paid off, the building reverts to the doctor group, he said.

“This program has been around for quite awhile,” Hamm said. “It's for any business, whether a doctor, dentist or manufacturer.”

In Kansas, the first step would be to go to the city council or county commissioners to see whether they would be interested in a practice coming to town, he said. Ultimately, the project would need to be approved by the Kansas Court of Tax Appeals.

In Park Forest, Ill., a physician received a 55% break on his total property tax bill — for every taxing body — for 10 years when he built a new medical office in the village's downtown. The village board would consider giving the same incentive to other doctors who build a new office or occupy a long-vacant building, provided they follow the necessary steps and meet certain criteria, said Hildy Kingma, director of economic development and planning for Park Forest.

She said the break can be renewed for another 10 years. “We look for projects that will have an economic benefit to the village either through increased sales taxes, more jobs or an increase in property values. Doctors' offices have high traffic; that's important to us, too,” she said.

After an application is presented, the Economic Development Advisory Group makes a recommendation based on whether a business is financially sound and whether there is a financial gap that needs to be filled when constructing a new building. The process takes two to three months.

Kingma said each applicant needs to show what the project will cost and the amount of money brought to the project. “We want to make sure they can afford to operate here once open,” she said.

Towns and counties can designate tax increment financing districts for underdeveloped or blighted areas, but these often are used for infrastructure improvements. Some areas also will provide incentives based on hiring.

For any incentive, the first step is always the same — asking what's available.

“You don't have to provide high-paying jobs, but there may be something in particular the city is looking for,” Huddle said.

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Tips and warnings on business tax deductions

The Internal Revenue Service allows write-offs on business expenses for self-employed doctors that can add up to significant savings at tax time. Some are commonly overlooked, and physicians might not know about others. Here are some allowable deductions, what you must do to claim them and how to avoid red flags that could trigger an IRS audit:

  • Your vehicle can be deducted if you use it for business purposes, such as visiting patients in the hospital or nursing home; traveling to a satellite practice or work-related meeting; or taking it to a conference or a location to earn continuing medical education credits. You can't, however, claim mileage to commute to the office or for personal use. If you use the standard mileage deduction, in which you deduct a standard rate per mile set each year by the IRS, keep records of all miles and each trip's purpose. If you use the depreciation method, there is a bonus depreciation on a new automobile in 2013 for a maximum deduction of $11,160 in the first year. If you have a luxury vehicle, there are limits on how much you can depreciate. Experts say to do the math to determine which method works best for you.
  • If you're taking a CME course or attending a seminar, the airfare, meals and other expenses are deductible if you spend the majority of the time at the seminar. If you spend much time as a tourist, expenses would be prorated. Keep meticulous records, advisers warn.
  • Gratuities for service personnel may seem like small potatoes, but tax advisers say they can add up if you travel frequently and can be included in deductions. Write down every tip, including the airport luggage handler, the taxi driver, the waitress and the hotel maid.
  • Medical liability insurance, retirement plans, health insurance and any other employer-provided benefits for employees, employee wages and employment taxes are all deductible. The majority of doctors fail to take full advantage of pension plan deductions, according to tax experts. Under the Small Business Health Insurance Credit, the maximum credit through 2013 is 35% of the cost of health insurance for small-business employers. An enhanced version of the credit will be effective Jan. 1, 2014. In general, the rate will increase to 50% on that date.
  • Medical equipment, office supplies, uniforms such as lab coats and scrubs, advertising and promotion costs are deductible. Expensive equipment will be depreciated over several years. The IRS allows immediate expensing on up to $500,000 in equipment purchases in 2013 on up to $2 million of new and used purchases (Code Section 179) and 50% bonus depreciation on all new equipment (Code Section 168(k)). Limits are for federal purposes only, because many states have their own lower limits.
  • Lease and mortgage payments and taxes on the practice are deductible. Home offices also can be deductible. But deducting a home office, along with the home's Internet service, phone and computer, could be problematic if you do only paperwork there or if family members use the space and computer for purposes unrelated to the practice.
  • Gifts to employees and referring doctors are deductible. However, if you receive income as a result of a physician referral, that is taxable.
  • Unpaid medical bills could be deducted if you are on an accrual instead of a cash basis. In an accrual method, you are required to report bills sent, whether they've been paid or not. Under the cash method, you report only the cash you received.
  • Be wary of deducting gym and club memberships — both are red flags. They may be justifiable, but you need to describe the relationship to your business.
  • As a bonus, most states will follow the IRS and won't consider approved deductible expenses as income. This means you won't have to add these items back on your state form as taxable income.

Tax advice is from Brad Hall, a managing partner at Hall & Co., a certified public accounting firm in Orange County, Calif.; Tony Ilardi, a member of Dykema's taxation practice group in the Detroit area; Mark Luscombe, a CPA and attorney and the principal federal tax analyst for CCH of Riverwoods, Ill.; Gerard J. Kassouf, director at the Birmingham, Ala., CPA firm of L. Paul Kassouf & Co.; and Kathleen Thiess, a writer-editor of tax issues with Wolters Kluwer in Washington.

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