Were your pharmacy’s taxes a little more painful this year than you would have liked? Don Raby, tax expert and chief financial officer at PBA Health, a pharmacy services organization based in Kansas City, Mo., offers some advice on how to maximize your pharmacy’s deductions and make the best tax decisions for your business.
What are some steps that pharmacy owners can take now to optimize their tax deductions next year?
It’s too late in the year now to do extensive complex tax minimization strategies, but there are a couple of things that pharmacy owners can do even after the year-end. First, owners may still be able to make contributions to qualified retirement plans, depending on their specific situation. Second, they can still make an election under IRC Section 179 to expense certain qualified equipment purchases or leases made during the tax year. This election is made on Form 4562.
What are some tax-deductible expenses that pharmacy owners may not be aware of?
Generally, expenses that are deemed ‘ordinary and necessary’ are deductible. The IRS does not deem meals and entertainment expenses as necessary expenses, so taxpayers are limited to deducting 50 percent of money spent on food and entertainment. However, food and meals that are associated with a meeting, such as a store meeting where pizza is purchased, are arguably 100 percent deductible as a meeting expense.
A tax break offered to small businesses by Congress is what’s known as the Section 179 expense. This is essentially an accelerated depreciation expense that allows small businesses to expense 100 percent of qualifying assets in the year of acquisition, instead of capitalizing them and depreciating them over a number of years. It includes property that is bought, leased or financed.
This used to be called the “Hummer Tax Loophole.” (One of the most popular uses of the Section 179 deduction has been for vehicles.) But Congress and the IRS effectively plugged that hole a couple of years ago. However, this remains an excellent tax-reducing instrument for things such as computer systems, fixtures, and furniture and is easily elected on Form 4562. Storeowners should always consult their own tax adviser before purchasing any significant assets so they understand the tax options that may be available to them.
What advice would you give pharmacy owners who want to take better advantage of tax deductions in 2014?
Consult your tax adviser before doing anything major or out of the ordinary. If you don’t have a tax adviser, then get one whose focus is on small business. Having said that, the biggest area where small business owners really need to be proactive is in forward planning for the transition of their business to a new owner and estate planning. Both of these are complex issues that require extensive forward planning, but can save big money when those times arrive.
Can you recommend any resources?
The Internet has some good resources to do basic research and to help educate business owners. But I would not take anything I read on the Internet as authoritative, and I would certainly not recommend any actions be taken based on what one reads on the Internet. The best resource is always a tax professional whose focus is on small business. Find one who will take the time to understand your business, personal situation, and goals. Then ask questions—lots of questions.
If a pharmacy is looking to buy tax-deductible equipment, what is the best time of year to buy? What other time considerations should a pharmacy keep in mind regarding tax deductions?
For most small businesses, the Section 179 deduction election makes the timing of asset purchases or leases, such as computer systems, robots, or fixtures, a moot point. However, if one does not want to make the Section 179 election, the timing for purchasing assets can make a difference. The rule of thumb is that most assets need to be purchased and placed into service prior to the fourth quarter of the current tax year. The timing of purchases affects the depreciation convention that businesses must use. As always, consult a competent tax adviser for specific details.
Are there any common mistakes that you see pharmacies make when it comes to taxes?
By far the biggest mistake I see pharmacies and small businesses make is a failure to be proactive and seek sound, competent tax advice prior to entering into a transaction such as an asset acquisition or a buy-sell agreement. These are mistakes that can cost serious dollars and they are situations that can often arise unexpectedly and unavoidably, at inopportune times. Therefore, it is wise to think and plan for them before they happen.
Is there anything you would like to add?
The one takeaway I would like to leave small business owners with is the importance of seeking sound, competent financial, legal, and tax advice. Pharmacy owners work way too hard to see a good chunk of their work go to paying unnecessary taxes. I firmly believe in paying one’s fair share, but too many small business owners end up paying their fair share, plus a kicker to boot. This is avoidable, and good financial advice can alleviate much of this burden.
About the Expert
Before coming to PBA Health, Don Raby, CPA, worked for more than six years at one of the country’s top accounting firms. While there, he worked primarily in the tax department, with a focus on corporate taxation for small business owners, as well as for Fortune 500 companies. Raby has been with PBA Health for more than 12 years, and has worked extensively with pharmacists and pharmacy owners to improve the financial side of their businesses.
