This column will discuss several aspects of tax law and dermatology, including sales and cosmetic services taxes and deductions for equipment, software, and real estate depreciation, and gifts to patients. Running a dermatology practice is like running any small business. Understanding tax laws is essential. While a dermatologist does not have to be an expert in tax law, he or she should have a basic understanding of tax laws and should also retain trained professionals who are experts in tax law. This article will review a few aspects of tax law that may be of particular interest to dermatologists. Sales Tax As a general rule, prescription medications are not taxed by states.1 (Nine states also exempt over-the-counter medications.) Thus, a patient who purchases triamcinalone 0.1% cream does not pay a sales tax, and the physician who sells that triamcinolone 0.1% cream does not have to collect sales tax. This exemption on sales tax for medications, however, does not apply to sun blocks, sun screens or cosmeceuticals. So, if you sell such products, you must collect sales taxes and likely file quarterly reports and send payment to your state government. Failure to pay taxes promptly results in penalties to you, so your office manager must stay on top of constant filings if you sell taxable products. Taxes on Cosmetic Services — Now Only In New Jersey Botox and fillers are prescription products, and sale of the products as goods themselves is not taxed. Their administration as cosmetics services, however, is taxed only in New Jersey, based on a bill passed in 2004.2 This tax in New Jersey has raised only a fraction of the money expected. It requires that cosmetic taxes be paid quarterly like a sales tax. While the New Jersey state legislature voted to repeal the law in 2006, the state senate and governor did not concur, so, to my knowledge, the law is still in force with uncertain effect. Other states have considered but have not yet passed cosmetic taxes. A bill was introduced in Hawaii (HB 175) that exempted all medical services from general excise taxes, with the exception of cosmetic surgery and plastic surgery, but it did not pass. In Connecticut, a cosmetic surgery tax was introduced but did not pass. Another bill that did not pass was Minnesota’s HB 1027, which proposed to tax cosmetic medical procedures at the state’s sales tax rate of 6.5%. That tax would be assessed on top of the existing 2% gross revenue tax on healthcare services in the state for procedures that “improve appearance, body image, or self-esteem and do not meaningfully promote the proper function of the body or prevent or treat illness or disease.” Procedures subject to that tax would have included: cosmetic surgery, hair transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peels, laser hair removal, laser skin resurfacing, laser treatment of leg veins, sclerotherapy and cosmetic dentistry. Equipment Tax Deductions Tax Code Section 179 is an expense deduction provided for taxpayers who elect to treat the cost of qualifying property (Section 179 property) as an expense rather than a capital expenditure. Section 179 essentially allows just that: You can deduct from your taxable income the full amount of equipment purchases up to the approved limit for a given year (almost doubled to $250,000 for 2008). This applies to lasers, fancy examination chairs, frozen section machines for Mohs, labs for processing specimens in your office (CLIA aside) and titanium surgical instruments. Of course, this assumes the equipment is installed during the calendar year. The equipment doesn’t have to be new, as long as it’s newly purchased and will be used at least half of the time for your business. Equipment includes computers, machines, furniture, cars and a host of other necessities. Movable equipment generally counts; property does not. The election, which is made on Form 4562, is for the tax year the property was placed in service. Under Section 179, equipment purchases, up to the amount approved for a given year, can be deducted from taxable income if installed by December 31st. The cap completely phases out the use of Section 179 for 2008 when the equipment purchases exceed $800,000 (in 2008). For further details, contact your tax advisor or visit www.irs.gov and reference Form 4562. In 2009, section 179 will go back to $108,000 with a $510,000 phaseout, but as the current economic rut persists, the 2008 limits might come back, so keep in touch with your CPA. An additional first-year depreciation deduction equal to 50% of adjusted basis is allowed for qualifying property placed in service after December 31, 2007, and before January 1, 2009. Software Deductions Software normally must be written off over 3 years, because it will serve your business for more than 1 year. Section 179, however, allows small businesses to fully deduct off-the-shelf software the year it is purchased, as long as it is used the same year. Gifts To Patients Business gifts of up to $25 a year per recipient are deductible. If the gift costs no more than $4 and your name is engraved (for example, a pen), it does not count as a gift. To avoid confusion, many deem their gifts “promotions” or “advertising,” because advertising and promotions directly related to your business are deductible as miscellaneous expenses. (See Publication 535 for information on writing off advertising and other costs.) Be aware that designation in your accounting that a gift is “promotional advertising” and thereby avoids the $25 limit does not make you audit-proof. If you give your patient or associate a $30 gift without your name printed on the gift, clearly only $25 is deductible. But if you are audited, the tax consideration depends on the auditor’s assessment of the reasonableness and the advertising potential of the gift. Commercial Property Owner Alterations Dermatologists who own and alter their buildings should be aware of the time course of real estate depreciation, which is generally 39 years. Energy Refitting New in 2006 and expiring at the end of 2008 is a deduction for commercial building owners whose buildings meet certain energy standards. The deduction is as much as $1.80 per square foot for buildings that achieve a 50% energy savings target. Before claiming the deduction, the owner must obtain a certification that the required energy savings will be achieved. So if you did special energy refitting that fits these criteria and did not know about it, you can give yourself a pat on the back and decrease your taxes; soon after this article appears the credit will expire. Disabled Access Credit for Small Businesses The disabled access credit for small businesses (defined below) lets you take a credit for 50% of costs for certain Americans with Disabilities Act (ADA) compliance over a total $250. This means that for every dollar you spend on ADA compliance over $250 a year, you get 50 cents back, with a maximum $5,000 per year. To receive the maximum, you would have to spend at least $10,250 on compliance, such as barrier removal or provision of auxiliary aids and services to disabled customers or employees, e.g., wheelchair ramps, Braille menus, and handicapped-accessible bathroom equipment, as long as the modifications comply with the ADA guidelines. The IRS defines a small business as a business that has fewer than 30 employees or $1 million or less in gross revenue in the past year. So, even if your business grossed $4 million, if you only have 20 employees, you can qualify as a small business. On the other hand, if you have 40 employees, but grossed less than $1 million, you are still eligible for the disabled access credit. This is different than the Medicare definition, which hinges on whether a business earned more or less than $5 million. Disabled Access Deduction The second incentive, the tax deduction, can by used by both large and small businesses every tax year. All businesses can receive a deduction of up to $15,000 on all expenditures removing physical barriers to the disabled. This works by allowing you to expense that $15,000 of barrier removal instead of counting the removal in the capitalized or depreciated column. Physical barriers may be either architecture- or transportation-related — e.g., widening doors, putting wheelchair lifts on delivery vans or installing handrails. (See your CPA and Internal Revenue Code Regulation 1.190-2 for more information.) Conclusion My hope is that at least one of these ideas reduces your tax burden for 2008. Happy New Year. Dr. Scheinfeld graduated from Harvard Law School in 1989 and Yale Medical School in 1997. He’s an Assistant Clinical Professor at Columbia University.
Dermatologists and Taxes
This column will discuss several aspects of tax law and dermatology, including sales and cosmetic services taxes and deductions for equipment, software, and real estate depreciation, and gifts to patients. Running a dermatology practice is like running any small business. Understanding tax laws is essential. While a dermatologist does not have to be an expert in tax law, he or she should have a basic understanding of tax laws and should also retain trained professionals who are experts in tax law. This article will review a few aspects of tax law that may be of particular interest to dermatologists. Sales Tax As a general rule, prescription medications are not taxed by states.1 (Nine states also exempt over-the-counter medications.) Thus, a patient who purchases triamcinalone 0.1% cream does not pay a sales tax, and the physician who sells that triamcinolone 0.1% cream does not have to collect sales tax. This exemption on sales tax for medications, however, does not apply to sun blocks, sun screens or cosmeceuticals. So, if you sell such products, you must collect sales taxes and likely file quarterly reports and send payment to your state government. Failure to pay taxes promptly results in penalties to you, so your office manager must stay on top of constant filings if you sell taxable products. Taxes on Cosmetic Services — Now Only In New Jersey Botox and fillers are prescription products, and sale of the products as goods themselves is not taxed. Their administration as cosmetics services, however, is taxed only in New Jersey, based on a bill passed in 2004.2 This tax in New Jersey has raised only a fraction of the money expected. It requires that cosmetic taxes be paid quarterly like a sales tax. While the New Jersey state legislature voted to repeal the law in 2006, the state senate and governor did not concur, so, to my knowledge, the law is still in force with uncertain effect. Other states have considered but have not yet passed cosmetic taxes. A bill was introduced in Hawaii (HB 175) that exempted all medical services from general excise taxes, with the exception of cosmetic surgery and plastic surgery, but it did not pass. In Connecticut, a cosmetic surgery tax was introduced but did not pass. Another bill that did not pass was Minnesota’s HB 1027, which proposed to tax cosmetic medical procedures at the state’s sales tax rate of 6.5%. That tax would be assessed on top of the existing 2% gross revenue tax on healthcare services in the state for procedures that “improve appearance, body image, or self-esteem and do not meaningfully promote the proper function of the body or prevent or treat illness or disease.” Procedures subject to that tax would have included: cosmetic surgery, hair transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peels, laser hair removal, laser skin resurfacing, laser treatment of leg veins, sclerotherapy and cosmetic dentistry. Equipment Tax Deductions Tax Code Section 179 is an expense deduction provided for taxpayers who elect to treat the cost of qualifying property (Section 179 property) as an expense rather than a capital expenditure. Section 179 essentially allows just that: You can deduct from your taxable income the full amount of equipment purchases up to the approved limit for a given year (almost doubled to $250,000 for 2008). This applies to lasers, fancy examination chairs, frozen section machines for Mohs, labs for processing specimens in your office (CLIA aside) and titanium surgical instruments. Of course, this assumes the equipment is installed during the calendar year. The equipment doesn’t have to be new, as long as it’s newly purchased and will be used at least half of the time for your business. Equipment includes computers, machines, furniture, cars and a host of other necessities. Movable equipment generally counts; property does not. The election, which is made on Form 4562, is for the tax year the property was placed in service. Under Section 179, equipment purchases, up to the amount approved for a given year, can be deducted from taxable income if installed by December 31st. The cap completely phases out the use of Section 179 for 2008 when the equipment purchases exceed $800,000 (in 2008). For further details, contact your tax advisor or visit www.irs.gov and reference Form 4562. In 2009, section 179 will go back to $108,000 with a $510,000 phaseout, but as the current economic rut persists, the 2008 limits might come back, so keep in touch with your CPA. An additional first-year depreciation deduction equal to 50% of adjusted basis is allowed for qualifying property placed in service after December 31, 2007, and before January 1, 2009. Software Deductions Software normally must be written off over 3 years, because it will serve your business for more than 1 year. Section 179, however, allows small businesses to fully deduct off-the-shelf software the year it is purchased, as long as it is used the same year. Gifts To Patients Business gifts of up to $25 a year per recipient are deductible. If the gift costs no more than $4 and your name is engraved (for example, a pen), it does not count as a gift. To avoid confusion, many deem their gifts “promotions” or “advertising,” because advertising and promotions directly related to your business are deductible as miscellaneous expenses. (See Publication 535 for information on writing off advertising and other costs.) Be aware that designation in your accounting that a gift is “promotional advertising” and thereby avoids the $25 limit does not make you audit-proof. If you give your patient or associate a $30 gift without your name printed on the gift, clearly only $25 is deductible. But if you are audited, the tax consideration depends on the auditor’s assessment of the reasonableness and the advertising potential of the gift. Commercial Property Owner Alterations Dermatologists who own and alter their buildings should be aware of the time course of real estate depreciation, which is generally 39 years. Energy Refitting New in 2006 and expiring at the end of 2008 is a deduction for commercial building owners whose buildings meet certain energy standards. The deduction is as much as $1.80 per square foot for buildings that achieve a 50% energy savings target. Before claiming the deduction, the owner must obtain a certification that the required energy savings will be achieved. So if you did special energy refitting that fits these criteria and did not know about it, you can give yourself a pat on the back and decrease your taxes; soon after this article appears the credit will expire. Disabled Access Credit for Small Businesses The disabled access credit for small businesses (defined below) lets you take a credit for 50% of costs for certain Americans with Disabilities Act (ADA) compliance over a total $250. This means that for every dollar you spend on ADA compliance over $250 a year, you get 50 cents back, with a maximum $5,000 per year. To receive the maximum, you would have to spend at least $10,250 on compliance, such as barrier removal or provision of auxiliary aids and services to disabled customers or employees, e.g., wheelchair ramps, Braille menus, and handicapped-accessible bathroom equipment, as long as the modifications comply with the ADA guidelines. The IRS defines a small business as a business that has fewer than 30 employees or $1 million or less in gross revenue in the past year. So, even if your business grossed $4 million, if you only have 20 employees, you can qualify as a small business. On the other hand, if you have 40 employees, but grossed less than $1 million, you are still eligible for the disabled access credit. This is different than the Medicare definition, which hinges on whether a business earned more or less than $5 million. Disabled Access Deduction The second incentive, the tax deduction, can by used by both large and small businesses every tax year. All businesses can receive a deduction of up to $15,000 on all expenditures removing physical barriers to the disabled. This works by allowing you to expense that $15,000 of barrier removal instead of counting the removal in the capitalized or depreciated column. Physical barriers may be either architecture- or transportation-related — e.g., widening doors, putting wheelchair lifts on delivery vans or installing handrails. (See your CPA and Internal Revenue Code Regulation 1.190-2 for more information.) Conclusion My hope is that at least one of these ideas reduces your tax burden for 2008. Happy New Year. Dr. Scheinfeld graduated from Harvard Law School in 1989 and Yale Medical School in 1997. He’s an Assistant Clinical Professor at Columbia University.
This column will discuss several aspects of tax law and dermatology, including sales and cosmetic services taxes and deductions for equipment, software, and real estate depreciation, and gifts to patients. Running a dermatology practice is like running any small business. Understanding tax laws is essential. While a dermatologist does not have to be an expert in tax law, he or she should have a basic understanding of tax laws and should also retain trained professionals who are experts in tax law. This article will review a few aspects of tax law that may be of particular interest to dermatologists. Sales Tax As a general rule, prescription medications are not taxed by states.1 (Nine states also exempt over-the-counter medications.) Thus, a patient who purchases triamcinalone 0.1% cream does not pay a sales tax, and the physician who sells that triamcinolone 0.1% cream does not have to collect sales tax. This exemption on sales tax for medications, however, does not apply to sun blocks, sun screens or cosmeceuticals. So, if you sell such products, you must collect sales taxes and likely file quarterly reports and send payment to your state government. Failure to pay taxes promptly results in penalties to you, so your office manager must stay on top of constant filings if you sell taxable products. Taxes on Cosmetic Services — Now Only In New Jersey Botox and fillers are prescription products, and sale of the products as goods themselves is not taxed. Their administration as cosmetics services, however, is taxed only in New Jersey, based on a bill passed in 2004.2 This tax in New Jersey has raised only a fraction of the money expected. It requires that cosmetic taxes be paid quarterly like a sales tax. While the New Jersey state legislature voted to repeal the law in 2006, the state senate and governor did not concur, so, to my knowledge, the law is still in force with uncertain effect. Other states have considered but have not yet passed cosmetic taxes. A bill was introduced in Hawaii (HB 175) that exempted all medical services from general excise taxes, with the exception of cosmetic surgery and plastic surgery, but it did not pass. In Connecticut, a cosmetic surgery tax was introduced but did not pass. Another bill that did not pass was Minnesota’s HB 1027, which proposed to tax cosmetic medical procedures at the state’s sales tax rate of 6.5%. That tax would be assessed on top of the existing 2% gross revenue tax on healthcare services in the state for procedures that “improve appearance, body image, or self-esteem and do not meaningfully promote the proper function of the body or prevent or treat illness or disease.” Procedures subject to that tax would have included: cosmetic surgery, hair transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peels, laser hair removal, laser skin resurfacing, laser treatment of leg veins, sclerotherapy and cosmetic dentistry. Equipment Tax Deductions Tax Code Section 179 is an expense deduction provided for taxpayers who elect to treat the cost of qualifying property (Section 179 property) as an expense rather than a capital expenditure. Section 179 essentially allows just that: You can deduct from your taxable income the full amount of equipment purchases up to the approved limit for a given year (almost doubled to $250,000 for 2008). This applies to lasers, fancy examination chairs, frozen section machines for Mohs, labs for processing specimens in your office (CLIA aside) and titanium surgical instruments. Of course, this assumes the equipment is installed during the calendar year. The equipment doesn’t have to be new, as long as it’s newly purchased and will be used at least half of the time for your business. Equipment includes computers, machines, furniture, cars and a host of other necessities. Movable equipment generally counts; property does not. The election, which is made on Form 4562, is for the tax year the property was placed in service. Under Section 179, equipment purchases, up to the amount approved for a given year, can be deducted from taxable income if installed by December 31st. The cap completely phases out the use of Section 179 for 2008 when the equipment purchases exceed $800,000 (in 2008). For further details, contact your tax advisor or visit www.irs.gov and reference Form 4562. In 2009, section 179 will go back to $108,000 with a $510,000 phaseout, but as the current economic rut persists, the 2008 limits might come back, so keep in touch with your CPA. An additional first-year depreciation deduction equal to 50% of adjusted basis is allowed for qualifying property placed in service after December 31, 2007, and before January 1, 2009. Software Deductions Software normally must be written off over 3 years, because it will serve your business for more than 1 year. Section 179, however, allows small businesses to fully deduct off-the-shelf software the year it is purchased, as long as it is used the same year. Gifts To Patients Business gifts of up to $25 a year per recipient are deductible. If the gift costs no more than $4 and your name is engraved (for example, a pen), it does not count as a gift. To avoid confusion, many deem their gifts “promotions” or “advertising,” because advertising and promotions directly related to your business are deductible as miscellaneous expenses. (See Publication 535 for information on writing off advertising and other costs.) Be aware that designation in your accounting that a gift is “promotional advertising” and thereby avoids the $25 limit does not make you audit-proof. If you give your patient or associate a $30 gift without your name printed on the gift, clearly only $25 is deductible. But if you are audited, the tax consideration depends on the auditor’s assessment of the reasonableness and the advertising potential of the gift. Commercial Property Owner Alterations Dermatologists who own and alter their buildings should be aware of the time course of real estate depreciation, which is generally 39 years. Energy Refitting New in 2006 and expiring at the end of 2008 is a deduction for commercial building owners whose buildings meet certain energy standards. The deduction is as much as $1.80 per square foot for buildings that achieve a 50% energy savings target. Before claiming the deduction, the owner must obtain a certification that the required energy savings will be achieved. So if you did special energy refitting that fits these criteria and did not know about it, you can give yourself a pat on the back and decrease your taxes; soon after this article appears the credit will expire. Disabled Access Credit for Small Businesses The disabled access credit for small businesses (defined below) lets you take a credit for 50% of costs for certain Americans with Disabilities Act (ADA) compliance over a total $250. This means that for every dollar you spend on ADA compliance over $250 a year, you get 50 cents back, with a maximum $5,000 per year. To receive the maximum, you would have to spend at least $10,250 on compliance, such as barrier removal or provision of auxiliary aids and services to disabled customers or employees, e.g., wheelchair ramps, Braille menus, and handicapped-accessible bathroom equipment, as long as the modifications comply with the ADA guidelines. The IRS defines a small business as a business that has fewer than 30 employees or $1 million or less in gross revenue in the past year. So, even if your business grossed $4 million, if you only have 20 employees, you can qualify as a small business. On the other hand, if you have 40 employees, but grossed less than $1 million, you are still eligible for the disabled access credit. This is different than the Medicare definition, which hinges on whether a business earned more or less than $5 million. Disabled Access Deduction The second incentive, the tax deduction, can by used by both large and small businesses every tax year. All businesses can receive a deduction of up to $15,000 on all expenditures removing physical barriers to the disabled. This works by allowing you to expense that $15,000 of barrier removal instead of counting the removal in the capitalized or depreciated column. Physical barriers may be either architecture- or transportation-related — e.g., widening doors, putting wheelchair lifts on delivery vans or installing handrails. (See your CPA and Internal Revenue Code Regulation 1.190-2 for more information.) Conclusion My hope is that at least one of these ideas reduces your tax burden for 2008. Happy New Year. Dr. Scheinfeld graduated from Harvard Law School in 1989 and Yale Medical School in 1997. He’s an Assistant Clinical Professor at Columbia University.
