How Dentists and Doctors can save when using a Tax Service in Paradise Valley

How Dentists and Doctors can save when using a Tax Service in Paradise Valley By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

As a Phoenix CPA and Arizona CPA tax preparer and tax planner and tax coach,  my CPA firm is always looking for easy and fast ways to reduce income taxes.

 

At the end of this article, I will explain how it is simple to save $16,000 in income taxes.  So, bear with me.

 

Please call me if you would like to discuss.

 

Welcome to Treasury Reg. Sec. 1.162-3 which prescribes when materials and supplies that may have been inventoried is allowed to be deducted immediately.

 

I am grateful that I love what I do and have done it for a long time!  I enjoy writing tax saving articles because I feel good about contributing to legally reducing taxes!

 

In most cases, clients have to spend more time documenting auto mileage, meal and entertainment, business use to be allowed to take the tax deduction. Our clients go through a short learning curve to understand how to be smart when it comes to saving taxes!

 

How would you like to get a faster and better tax deduction by NOT documenting but being sloppy?

 

Treasury Regulation Sec 1.162-3 says if you do not inventory but expenses “INCIDENTAL” expenditures for materials and supplies, you GET TO DEDUCT THE EXPENDITURE IMMEDIATELY! 

 

Incidental Material and Supplies (Good tax deduction)  vs NOT incidental (Bad tax deduction).

 

YOU DO NOT NEED TO UNDERSTAND ALL OF THIS IF YOU HAVE A Phoenix CPA WHO UNDERSTANDS THE DIFFERENCE!!

 

 

Incidental materials and supplies for which no inventory is maintained may be deducted in the year purchased by a cash method taxpayer.  If you own a restaurant and you did not count napkins and other paper supplies that are not consumed by the guest AND you did not inventory these supplies, you can deduct the expenditure when you pay for it even if you do not use up the supplies until the next year.

 

If you are dentist in the medical field and your practice inventories medical supplies as an asset and then adjusts inventory each month and/or at the end of the year, you inadvertently are hurting yourself because you are not getting the tax deduction and are paying too much in income taxes.

 

If your medical supplies inventory is $50,000 as an asset in the balance sheet you are inadvertently saying that these medical supplies are a material percentage  (called “Not incidental”=materially important) of your medical practice inventory resulting in the loss of the tax deduction. 

 

If your sole practice was giving medical injections to patients, the medical supplies would be considered “not incidental” and would have to be capitalized as an inventory asset and the supplies expense could not be recognized until the supplies were used (consumed) which could be the next tax year.

 

I talk about the importance of getting a tax deduction in the same year that cash is paid out or there will be a negative “GAP” because cash had been used without getting a tax deduction.  Writing off or getting a tax deduction when you pay for the medical supplies results in Zero “GAP”.

 

What if you have been inventorying these materials and supplies? Can you simply stop inventorying and take the deduction or write-off? NO, your CPA must prepare a Form 3115 Change of Accounting Method. Good news? Yes, the change is automatically approved without IRS permission

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Key take away to remember:  “not incidental “materials and supplies have to be inventoried and are therefore deducted in the year you paid for them or in the year they are consumed (or provided to a customer), whichever is later. 

That is the problem. If you inventory material and supplies, you KNOW when they are consumed and have to wait until they are used up.

 

Key Take Away: If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and to deduct from gross income the total cost of such supplies and materials as were purchased during the taxable year for which the return is made, provided the taxable income is clearly reflected by this method.Incidental materials and supplies for which no inventory is maintained may be deducted in the year purchased by a cash method taxpayer.

 

 

An Inventoriable Item Defined in Revenue Procedure 2002-28

 

 

However, as previously stated, nonincidental materials and supplies are deducted in the year you paid for them or in the year they are consumed (or provided to a customer), whichever is later.

 

Let me say it a different way:  The second part of Section 1.162-3 deals with when the cost of incidental materials and supplies that are kept on hand may be deducted. Incidental materials and supplies may be deducted in the year of purchase when:

 

No records are maintained indicating when supplies are actually used.

No inventory is taken of the amount of supplies on hand at the beginning and end of the year, and Income is clearly reflected for the year.  

 

Income is clearly reflected a judgment call.   If the costs of the materials and supplies is 4% of revenues, I would think that the material and supplies could be expensed and not inventoried but if 40% revenues, I would not be successful in arguing that the material and supplies should not be inventoried and expensed when they have been used up which could very well be the next year.

 

For example, if a cash basis medical practice with $1,500,000 of revenues buys $40,000 of medical supplies on December 30th and uses the supplies in the next year.  If inventoried the supplies are considered nonincidental and are not deductible but if NOT inventoried the supplies are considered incidental and is deductible.

 

  1. Cash $40,000 Taxable income is say $50,000 on 12-30 before the purchase.
  2. The office is closed on 12-30 and 12-31.
  3. The supplies are NOT inventoried because they are considered “INCIDENTAL” to the practice.
  4. The taxable income on a cash basis after the purchase is $10,000 and cash is zero.  TAX TIP: However if put on credit card cash does not go down on 12-30 and cash remains at $40,000 while taxable income becomes just $10,000. So if another $10,000 is used to pay for another expense like January rent, cash is still positive at $30,000 why taxable income is zero.
  5. If the Doctor(s) are in the 40% tax bracket, they have saved 40% of $40,000 or $16,000 in tax by simply understanding how to be “smart” by using the right CPA.
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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com