This column does not replace individual consultation with an accountant. It is intended to provide basic information so that you can become informed and be an active participant when consulting with professionals. The information presented is intended for educational and informational purposes only.
With tax time fast approaching, many of the emails I have been receiving are about what expenses therapists who are either independent contractors and/ or self employed can legitimately deduct on their taxes. For starters, any expense you are thinking about deducting must be what is considered “ordinary and necessary” in the course of providing therapy services. Additionally, the expense must be deemed “reasonable”. I have complied a basic list of what typically can be considered legitimate business deductions, focusing on those deductions that generally create the most confusion for therapists.
Rent / Sublease fees /Use of Home Office
If you rent or sublease space to provide therapy services, your costs are fully deductable.
The issue of the home office is more complicated. According to the IRS, the fundamental requirements to qualify for home office deductions include that you exclusively and regularly use that part of your home for business purposes. Many therapists do not treat patients or meet with potential clients or referral sources in their homes. But your home can still be deemed as your principal place of business if you conduct management and/or administrative activities related to your practice solely from your home, and not from any other fixed location. For example, you can do home care, or even sublease treatment space at another therapists’ office, but if you do all your billing/ bookkeeping / follow up telephone calls/ scheduling from your home office, you would qualify for pro-rated deductions for that portion of your house. The use of that part of your home must be continuous, not occasional. The computer you use in your home office should not be the computer you use for personal emails.
Generally, the qualified deductable amount depends on the percentage of your home that is used for business. Exclusive business use of a 20x 10 foot bedroom within a 2,000 square foot house would qualify you for a 10 percent deduction of your rent and associated utilities ( gas, electric, land line and cell phone, internet access, pagers).
If your gross income from therapy work is less than the total business expenses you have, your deductions will be limited. The IRS has a specific form and worksheet, #8829 where you can calculate this. If you find that your deductions for a particular year are limited, you might be able to carry the deductions and apply them to next year’s return. There is also a helpful IRS publication #587 that details home office rules.
If a patient or insurance carrier owe you money for services rendered , and you have been unsuccessful in collecting your fees, you can deduct that amount as “bad debt”. Some private practitioners knowingly bill an insurance carrier a higher fee than is in the fee schedule, or that they have contracted for in order to generate “balances due” which they will later claim as bad debt. This is a highly questionable business practice. It may actually be viewed as insurance fraud and in my experience, does not bode well during an audit.
Most therapists who do home care use their car both for personal and business use. If your vehicle is not used 100% for business, deductions will have to be pro-rated, but can include parking fees, tolls, and even interest if you have a vehicle loan. Discuss with your tax preparer if you are better off using actual expenses or the standard mileage rate ( which in 2010 is .50cents). It is necessary that you keep a detailed log for mileage which includes number of business miles driven, date, and purpose. Home care therapists would have to include detailed logs related to home visits.
You can deduct the full cost of malpractice, general liability, worker’s compensation, as well as 100% of your personal health insurance premiums
Legal and Professional Fees
Any fees you pay to an accountant, attorney or business advisor are fully deductable
Licenses/ Professional Memberships
All professional license fees and membership fees to national and regional professional organizations, including subscriptions to trade magazines, professional journals are fully deductable.
Postage, bank charges, entertainment including meals ( usually at 50%), participation in continuing education, charitable donations