Running a successful private practice requires not only excellent clinical skills, but also good knowledge in accounting, tax and financial analysis. If you’re flustered by the mere thought of bookkeeping, tax forms and business strategies, you are not alone. Learning and managing a business can get very isolating and overwhelming. Chicago Minds understands challenges in growing your private practice and we want to be part of the solution.
We partnered with Jennie Schottmiller from Simple Profit to host a free virtual webinar on accounting, tax and financial analysis for your business. Whether you’re a therapist looking to start your own private practice or you have questions about your existing practice, this will be a great resource for you. If you would like a copy of the recording, please contact us.
Here is a compilation of some common questions and Jennie’s answers from our webinar.
Deductions
Q: Are staff meals tax deductible?
A: When it comes to staff meals, the regulation can get complicated based on the the situations. Please refer to the Simple Profit blog post written specifically on business meals and parties deduction.
Q: What about home office deductions?
A: Home office deduction is very interesting and it is one of the most complicated deductions. Here are some main things to consider.
-
You need to have a dedicated space in your home. It does not need to be a whole room, but it needs to be an exclusive space for work only purposes.
-
Not only the space needs to be exclusive for work, it also needs to be used on a regular basis as a regular operation of your business.
Regarding home office deduction, there are two types.
-
The actual expenses method. For example, you add all your expenses and deduct the percentage related to your office.
-
Another one is the simplified method. It gives you 5 dollars per square foot per year. If you do the math, it is a very small deduction.
The actual expenses method may give you a higher deduction, but it entails more work in tracking and calculation. The simplified method is much easier, but the deduction is smaller.
There are many confusions around home office deduction even among accountants. Simple Profit has a blog written about it.
Q: Taking a loan for a car?
A: There is a blog post for this. Usually for a private practice, the standard deduction is the most advantageous deduction for car expenses. You can deduct from driving between two offices. When you have a car loan, you can deduct a portion of your interests. All this hinges on keeping very good mileage records. Ideally you track your odometer, if it is too arduous to track for each trip, you can record your odometer mileage at the beginning and end of the year. The reason IRS tracks odometer reading is because they wanna know how much you drive in a year and to see if your deduction makes sense compared with your total miles.
Q: Can you deduct public transportation costs if you don’t have a car to drive between offices?
A: Yes! Mileage and transportation cost for work purposes. Other cost usually comes up is parking. You can’t deduct parking if it is your main office, because it is considered as part of the normal commute. However, if you go to a training, a client, or a networking event, you can deduct the parking, just make sure you keep a record of the receipts.
Taxable Income
Q: What about paying taxes quarterly? I started doing that this year and I almost fell over. I did 30% for federal and 4.95% for IL. That’s A LOT… The CPA explained it is because I have to pay MY portion and the Employer portion.
A: Think about this way, if you work for someone else, you are gonna bring in revenue and they are gonna pay the bills. They are gonna make money off of every session you have. You don’t have to pay 7.5% self-employment tax, but you also lose maybe 30% of your revenue. Self-employment tax and payroll tax are both 15.3%. When you work for someone else, they pay 7.65% and you pay 7.65%. When you are self-employed, you pay both sides of it. When you are your own employee, you pay half and your business pays half. You would get to keep all the profit. If you are an S-corp, the employer portion gets deducted and you don’t pay income tax on it. If you are self-employed, half of it is a tax deduction and you are not paying income tax on all your income.
Another thing is, 30% is a general number that everyone starts with usually, but you might not have to pay 30%. When you get your tax completed, have you account to explain to you what your actual effective federal tax rate is, because the actual rate might be lower. The standard deduction of $12,000 and Qualified Business Income (QBI) deduction might end up lowering your actual tax rate.
Q: Would an S corp be the best way to bring down taxable income?
A: Not really. Situations may be different depending on your business designation. It is important to have someone to look at your income and tax after the first year of business and have the person do “what would’ve been if” scenarios. Make sure QBI is considered.
Q: We are not supposed to be collecting co-payments from clients during the crisis period. However, insurance companies are not always paying out the copayments to us. Can we treat that as a loss on next year’s taxes?
A: This is an important question. When we make less money, it is naturally a loss. We did not get the money, so there is a loss we experience financially. But it doesn’t reduce tax on the money we collected. For example, I was going to make $50,000 this year, but I only made $45,000 because of the co-pay issue with insurance. I am only going to pay taxes on $45,000, so it is already deducted. You can’t further deduct more. IRS only taxes on the money you actually did make.
Q: Can you write off when clients don’t pay copays or if they agreed to pay a certain amount and don’t pay at all?
A: It is the same idea. If there is a write off in EHR, then it will match my account accord. From the tax point, you only get tax on the income you actually made. Actually there is also a blog post on nopay.
Q: When you are self-employed and thus not paying yourself salary, can you just withdraw/transfer money from your business to a personal account as needed? How do you track that?
A: That is exactly right. The way you pay yourself will be a check or transferring money. In this day and age, IRS does everything electronically. A written check is not required, you can just transfer the money to yourself.
As you grow your practice, I highly recommend, as part of your cash management plan, you have a regular method of paying yourself. It wouldn’t run through as salary or payroll. If you have a regular method, like every friday or can be anything, it creates some structure and reliability to it. We call it owner’s drawers/pay. It does not go on the expense. In contrast, if you have an S-corp, the payroll becomes an expense of your business. That portion of your income will be taxed differently.
COVID-19 Resources
Q: I am doing private practice part-time while having a full time job, can I apply for the small business loan?
A: Please refer to the Simple Profit website. There are many resources there related to small business funds during COVID-19.
Q: Do you have advice for next steps for those of us who did or did not receive EIDL or PPP loans? Other than waiting to see if congress will come up with additional funds?
A: Two other big options. One is unemployment. Another is to look for other grants from local governments and organizations. Here are a few additional resources:
Chicago Small Business Resiliency Fund
