Make Informed Decisions Now to Minimize Future Tax Bills
Integrate tax planning into decisions year round
After April 15 you may be happy to not think about taxes for a while. But by year’s end, you may have missed several opportunities to maximize how much you keep from this year’s pharmacy income.
Minimizing the taxes you pay requires attention and planning throughout the year, starting with a good accounting system, said Ollin Sykes, president of Sykes & Co. P.A., certified public accountants and advisors, who has more than 40 years of experience working with independent pharmacy owners.
“Pharmacies need to first know where they stand [financially] daily, weekly and monthly,” Sykes said. “Those that understand where they are in real time can make the necessary tweaks and adjustments.”
When his firm reviews the QuickBooks records and tax returns of potential clients, they have found that half have glaring problems.
Keep Complete Records
Even tax deductions you think you are able to take may have more requirements than you realize. For example, to deduct a meal’s cost as a business expense on your taxes, you need not only to have the receipt, but also a note about the business purpose of that meal. “It takes both to make it a valid deduction,” Sykes said.
He uses the Taxbot app, which allows users to record receipts by taking a photo of receipts with their smartphones, and automatically categorize expenses by answering a few questions. The app also tracks mileage through a phone’s GPS.
Other popular apps for tracking business expenses include Shoeboxed and Expensify. Programs such as QuickBooks may also have an app for tracking expenses.
Even with those records, there are different options for how to account on your taxes for business expenses such as mileage or a home office. An accountant can help you determine which option is best for you.
The IRS cares about more than receipts. For example, for a business to be a valid corporation under the tax code, it must keep general minutes of its business meetings. “The documentation I see is often very poor,” Sykes said.
Consider Tax Impact on Decisions
Taxes shouldn’t drive decisions in your pharmacy, Sykes said, but they should be the number two factor you consider after economics.
For example, robotic, point of sale (POS) and interactive voice response (IVR) systems can reduce labor costs, one of the major controllable expenses in a pharmacy. There will be different tax implications, however, if you purchase or lease a system.
“The devil’s in the details,” Sykes said. For example, capital and operating leases are completely different in their impact on a business’s taxes, so talk with your accountant about such decisions.
Stay Up to Date
Also talk with your accountant about more than your monthly statements and fourth-quarter planning for your tax return.
In 2014, the amount that small businesses could deduct for technology, equipment and some software purchases under Section 179 of the tax code fell to just $25,000, but on December 19, 2014, the president signed a law raising the deduction back to $500,000 for 2014. However, purchases had to be delivered by year’s end to be deducted from that year’s taxes.
That left less than two weeks for businesses to react, but Sykes had been advising his clients throughout the year that Congress was likely to reinstate the $500,000 deduction.
The Section 179 deduction fell back to $25,000 in 2015, but lawmakers are discussing raising it again.
Make Sure Your Accountant Knows Your Business
“There are nuances for independent community pharmacies that are totally different than in other retail businesses,” Sykes said. If you are the only pharmacy client, your accountant may not know those nuances.
A compounding pharmacy, for example, may qualify for a domestic production activities deduction. You also should be talking with your accountant about issues such as third-party receivables and how you handle DIR fees, Sykes said.
With careful planning now, you can be confident that you won’t be hit with an unexpectedly high bill at tax time that requires you to file for an extension.
Start planning now — and get the expert advice and assistance you need — to minimize next year’s taxes.