Among the busiest of professionals, physicians and dentists have little time to learn about the latest tax law. Tax planning is neglected in the crush of other obligations. Yet making hasty year­end decisions in an attempt to reduce taxes is a very poor substitute for year-round tax planning.

Review these tax tips; then contact us for assistance in identifying and implementing the best tax-cutting strategies for you.

1. Choose your form of business wisely. You can conduct your medical practice as a sole proprietor, a partnership, a regular corporation (personal service corporation), or as an S corporation. Many states also now allow limited liability companies (LLCs) and limited liability partnerships (LLPs).

The form that you choose will have a direct bearing on the amount of tax you pay. As you might expect, each form has advantages and disadvantages. Don't make your decision based on the recommendations of colleagues. Get professional assistance so that you make the right choice for you.

2. If you are already in operation as a personal service corporation (PSC), review your situation. Using a fiscal year rather than a calendar year to defer income is generally not allowed. Retirement plan provisions are generally no better than those for proprietorships, partnerships, and S corporations. Also, PSCs pay a flat 35% on taxable income. Get advice on whether you should continue to operate as a PSC, elect S corporation status, or liquidate the corporation.

3. If you operate in corporate form, keep good corporate minutes. The IRS is less likely to give you problems about excess compensation, deferred compensation, pension contributions, and other tax considerations if minutes are accurate, detailed, and up-to-date.

4. Don't aggravate your tax bill with penalty charges. If you are required to make estimated tax payments, be certain that you are paying the minimum required.

5. Hire your children. The wages you pay will be deductible by your practice and taxable to your children in their own, presumably lower, tax brackets. Wages paid to your children under 18 are not subject to payroll taxes if you're a proprietorship or family partnership.

6. Keep adequate records for travel, meal, and entertainment expenses. Travel related to the operation of your practice is fully deductible. Commuting expenses, that is, travel to and from your work, are generally not deductible. Any business meal and entertainment expenses you incur are only partially deductible.

Keep an account book, diary, log, or expense record noting the amount spent, the date, time, and place of the expenditure, and the business purpose served by the activity.

7. Continuing education expenses are deductible. Keep track of them.

8. You can deduct membership dues in professional and public service organizations. Dues for such organizations as country clubs, golf and athletic clubs, airline clubs, and hotel clubs are not deductible.

9. You can elect to expense a certain amount of equipment costs in the year of purchase. Any amount you expense reduces your tax basis for depreciation. Vehicles have an expensing limit equal to first-year depreciation.

10. Do not assume that bartering is a tax­free activity. If you trade professional services for yourself and your family with other practitioners, you may have reportable income.

11. Consider leasing rather than buying medical equipment. Equipment leasing may result in financing and tax benefits that equipment purchasing does not offer. Generalizations in this area are impossible, however. Only a review of the specific transaction will enable you to make the best decision.

12. Consider some form of deferred compensation if you believe that income you receive in the future (for example, at retirement) could be taxed at lower rates than the present.

13. Don't be too quick to buy investments for tax reasons. The passive loss rules, at-risk rules, interest deduction limitations, and other frequent changes in the tax law make analysis of any investment more important than ever. Do not purchase any investment solely on the basis of current tax law. Always consult your tax advisor.

14. Shelter income with a retirement plan. The kind of plan you should have will depend on the legal form in which you practice, the number of employees you have, and the amount of retirement income the plan must provide. If you practice alone or in partnership, consider a Keogh plan or a SIMPLE plan. If you operate in corporate form, consider pension and profit­sharing plans. Get professional assistance to help you set up the right plan.

15. Don't look for unbelievably high-yield investments; they may be dissapointing. Consider more tried-and-true investments, such as municipal bonds or a sale-leaseback on your medical office building.

16. Consider the tax shelter aspects of owning a home. You get a deduction for real estate taxes and for interest on your home mortgage (up to $1 million) or home-equity loan where available (up to $100,000). Taxes and mortgage interest are itemized deductions subject to limitation for high-income taxpayers.

When you sell your personal residence, you can exclude from taxation up to $500,000 of profit if you're married and up to $250,000 if you're single. Certain time requirements must be met to qualify.

17. Give away income-producing assets that you no longer need. You should consider taking advantage of the annual gift tax exclusion to reduce your taxable income.

18. Consider taxes in building a college fund for your children. Check the tax breaks available for financing your children's college educations. If your income is not too high, you may qualify for several education tax breaks.

You should avoid college funding options that give your children too much unearned income. Amounts above a certain level will be taxed at your highest bracket. Instead, have your children's money invested in tax-free municipal bonds, U.S. Series EE savings bonds, or in growth stocks that can be sold when your children reach college age.

19. Conduct a second occupation as a business in order to maximize tax benefits. If you engage in a second "occupation" such as farming, breeding horses, conducting seminars, or writing, the activity will be considered a hobby (and the deductibility of expenses connected with it very limited) if you cannot show that you are engaged in the activity to produce a profit.

The IRS considers your activity to be a business if you show profits in three out of five consecutive years, or in the case of horse­related activities, in two out of seven consecutive years. If you show losses more often than that, you must prove to the IRS that you are in fact engaged in a business and not simply trying to write off the expenses of a personal hobby.

If such activities generate losses that you hope to deduct against income from your medical practice, you must meet the material participation rules. If you do not meet them, any losses are considered passive and are subject to the passive loss rules. That generally means they can only be deducted against passive income. The regulations in this area are complex. Get specific details if you are involved or intend to become involved in such activities.

20. Consider a tax-free exchange when you want to dispose of one piece of business or investment property and acquire another property. With a tax-free exchange, you can defer taxes until you dispose of the newly acquired property. Careful planning and professional assistance are necessary.

21. Always take a sensible approach when it comes to tax planning. Structuring transactions strictly on the tax consequences is seldom a good idea. Your investments, family financial planning, and business activities should have economic merit without the tax considerations.

However, taxes are a fact of life. The truth of the matter is that a little planning can often save a lot of money.

22. Do some planning in order to minimize your estate taxes. This final suggestion has to do with estate rather than income taxes. Since doctors typically earn good incomes, they are likely to have sizable estates.

There are still many ways to arrange your affairs to minimize estate taxes at your death. There is little sense in cutting your income taxes for a lifetime only to have a larger than necessary chunk of your estate go to the tax man at your death.

If you do not have a will and an estate plan, make an appointment soon to review estate planning options that fit your situation.

Contact our office if you'd like details or assistance with any tax concerns. We're here to help.