Medical practices often generate large amounts of income, which in turn lead to hefty tax obligations. While these obligations are unavoidable for the most part, there are a few legal strategies that can help reduce them. These strategies are not reserved only for large healthcare conglomerates, the tax code is available to all practices, regardless of size and income. All that is needed is the time and willingness to learn and implement them intelligently.

1. Entity selection

Choosing the appropriate type of business entity for your practice is an important step. It depends on the number of owners, and will decide how profits are taxed.

The choice depends on a few factors:

• How much revenue do you generate?
• Do you plan to have employees?
• Do you own any assets that need to be protected?
• What stare are you in?
• Is permanence or transferability more important to you?

Here are a few of the options:

Sole Proprietor: Simple and inexpensive to setup, being a sole proprietor means there is only a single owner of the business. Income tax is paid at the normal rate, with self-employment tax on 100% of profits. The latter means you are responsible for 15.3% of your Social Security and Medicare taxes with an additional 0.9% Medicare Tax if your income is over $200,000 filing as a single or $250,000 if filing jointly. You do not take a W-2 salary.

While easy to both setup and manage, sole proprietorships open the owner up to an unlimited amount of risk, as they are responsible for all liabilities. They also tend to be audited more frequently.

Partnerships: Similar to sole proprietorships, with the only difference being that there are two or more owners. Some states have laws mandating that businesses owned by married couples be incorporated as partnerships.

100% of profits will be passed to the owner and taxed at the ordinary rate and subject to the regular self-employment taxes. W-2 salaries are not taken. The same unlimited liability also applies here.

S-Corporations: S-corporations are pass through organizations, meaning income is taxed at individual level, though some states may apply entity level rates.

The main differences in taxation are that owners are required to take a salary, which is subject to social security and Medicare taxes. Profits above salary, however, are not subject to these, however, which leads to considerable savings.

While tax savings are significant, S-corporations are also very time consuming and expensive to manage..

C-Corporations: Stand-alone entities that protect against liability, apart from malpractice, allow for outside investors, with ownership easy to transfer via corporate stocks.

Taxed at entry level. Owners are required to receive a salary, with any further profits considered dividends and taxed as such. The same profit is double taxed this way, these organizations are also more expensive to administer.

2. Retirement Plans

Retirement plans are a great way to reduce taxable income. Contributing to a retirement plan will net you a tax deduction based on the size of your contribution. However, there may be limits to how much you can contribute, depending on the particular plan.

Money that has been contributed to a retirement plan will also be subject to a lower tax rate when transferring it to a retirement account. Retirement savings are tax deferred, meaning they can be grown tax free, with tax only being applied at the time of withdrawal.

Physicians often retire before they are required to take distributions from their retirement accounts – at age 72. This allows them the opportunity to take advantage of the lower tax rate much earlier, penalties for withdrawing tax savings only apply until age 59 1/2. Pre-tax retirement income can be converted into a post-tax retirement account , known as a Roth account.

Here are a few things to consider before starting your retirement plan:

• How early do you wish to start your retirement savings?
• Do you have employees?
• Are you planning to invest in your retirement?

If you think a retirement plan makes sense for you, consult a tax or financial advisor to pick the best plan.

3. Hiring Family

Hiring family members allows you to shift income from a higher tax bracket into a lower tax bracket. It also allows you the opportunity to give your children lessons in fiscal responsibility and financial management. Parents can also be hired.

While this is an easy strategy, there are a few things you need to be mindful of. Hired family members need to have legitimate jobs with reasonable wages.

4. Gift and Leaseback

Medical practices accumulate a large collection of expensive medical equipment. An easy tax saving strategy involving this equipment is to gift it to a family member, and then have them lease it back to you.

5. Use proper tools

With improve technology comes with improve tools, with the proper tools any job is easy, why not apply that to tax. Ecommerce sales tax software‘s are helpful in these situations as this automate sales tax registration, collection, calculation, filing, and multi-state nexus monitoring.