If you’re a pharmacy owner, you know how challenging it is to keep cash flow and profits strong. Inventory has to be just right, shrink needs to be controlled, and third-party payments can take who knows how long to come in. There are so many external factors out of your control that you really are better off focusing on internal factors like controlling your costs.
Luckily, the newest tax code update known as the Tax Cuts and Jobs Act (TCJA) has left plenty of room for you to save on your taxes. I like to call them loopholes because not everyone is aware of them. But don’t worry, these strategies are a safe way to take advantage of legal tax opportunities and greatly reduce your costs.
Here are the seven biggest legal tax loopholes pharmacy owners should be aware of:
1. The Augusta Rule
The Augusta, Georgia neighborhoods near the Augusta National Golf Club are full of beautiful homes. Locals have been renting their homes to visitors during the annual Masters Tournament for years. Back in the 1970s they got a law passed to protect themselves from paying tax on that rental income. Hence, the Augusta Rule.
You can take advantage of this tax law to save some money too. As long as you rent your personal home for fewer than 15 days per year, the income isn’t taxable. This includes renting to a business, even one that you own.
Next time you need a place to meet for your business, write a check from the business to rent your home as a meeting space. You’ll have a tax-deductible business expense on one side and tax-free income on the other. Just make sure you look up comparable rates for hotels and rental property so the fee is within reason and keep a good record of the business you conduct there during the meeting.
2. Business Trip or Vacation? Why not both?
There’s no slow season for pharmacies and finding time to get away is tough. But what if you could combine a business trip with a vacation and get a tax deduction while you’re at it?
Let’s say you’ve got a conference, event, or meeting to attend out of town. Traveling to and from an out of town business event is a deductible business trip. To qualify it has to serve a business purpose, be outside of your tax home (your city), and you have to spend the majority of your time conducting business. This is where you have some room to relax.
The IRS measures time in days. For instance, if you have a 5-day trip, you need at least 3 of those days to be mainly about business. The two days spent traveling to and from your destination count towards that number. In this case, you would only need one more to qualify. If you have a 1-day event, you could arrive a day early and leave a day late, giving yourself 2 days of downtime in the process.
So which expenses are tax-deductible for business travel? Transportation costs are deductible, including airfare, vehicle expenses, or a rental car. Lodging is also tax-deductible.
If you bring friends or family along, just be sure to deduct the appropriate costs. For example, if you need to get a bigger hotel room to accommodate the family, only the cost you would have paid for a single room is a business expense. The same goes for travel expenses if you have to rent a larger vehicle to make everyone comfortable.
3. A TCJA Prescription for Teaching Your Children About Business
One of the benefits of owning a business is the ability to employ members of the family. You can hire your spouse (more on that in a minute) or even your children to work in the pharmacy. As long as you follow a few rules, you can save money and provide your children with tax-free earned income in the process.
If your pharmacy is not a C-corporation and wholly owned by the parents, reasonable wages paid to your own children for necessary work are exempt from Social Security, Medicare, and Federal unemployment tax withholdings. They’ll get more of the wages to take home and you will be free from the employer contribution portion as well.
Just remember that you still have to follow child labor laws in regards to when and how much they can work and the type of work they are allowed to do at their age. The wages need to be appropriate for the job and the job must actually be necessary for the business. Sweeping up or stocking a few shelves are an easy option for most ages.
Another benefit of your child’s earned income is that their standard deduction will shield a good amount from federal income tax and they likely will be below the threshold to pay anything. Since it’s earned income, Kiddie Tax doesn’t apply and t=it can even qualify them to contribute to an IRA or college savings account.
4. The Hidden (Fringe) Benefits of Hiring Your Spouse
While we’re talking about keeping the business in the family, there are also some great perks for hiring your spouse. If he or she isn’t an owner of the business, a part-time job could be a great idea. Again, it needs to be a necessary job and a reasonable wage in line with the market. But it can be almost entirely tax-free.
A Section 105 medical reimbursement plan can form most or all of the reasonable compensation paid to your spouse for their work, as long as it is within limits. These contributions are a deductible wages expense for you and can be used by your spouse to cover out of pocket medical and dental expenses and insurance premiums.
You can choose to pay your spouse a mixture of wages and benefits or pay entirely in benefits, which would be completely tax-free. Just be sure you lay the plan out in detail and can support it if the IRS needs more information. Paying your spouse to hang around and keep you company could get you in hot water with the IRS.
5. Get More Mileage out of Your Vehicle Expense
If your pharmacy uses a vehicle at least 50% for business purposes, you can deduct a number of expenses. The big decision is whether you’ll track those expenses one by one (actual expense method) or simply multiply the miles driven by the predetermined rate (standard mileage rate method).
he standard rate is easier to track, but the TCJA just made the actual expense method much more appealing.
The actual expense method lets you include depreciation on your vehicle. Under the newest tax update, the limits on vehicle depreciation were greatly increased and bonus depreciation can be applied to many vehicles. Bonus depreciation allows a business to take additional depreciation deduction when a vehicle is first put into use.
If you deliver or use a vehicle for other business related purposes, this update could save you a ton in taxes.
6. Shrinking Meals Expense Deductions
Meals and entertainment expenses are one of the most confusing changes in the TCJA. In fact, the IRS wasn’t really clear on what they meant at first and have slowly been putting out clarifications.
Meals and entertainment were previously deductible expenses, but the TCJA cut entertainment out completely. This can make meals at a bar with live music, nightclub, or dinner theater tricky since there is an entertainment element involved.
Meals remain 50% deductible when they have a business purpose. This includes meeting an investor or business partner for a meal. If you go somewhere that could be seen as having an entertainment aspect, keep good notes and talk with your accountant about claiming the meal portion of the expense.
If you provide small snacks and coffee in the employee break room, don’t worry. These are considered a “de minimis” expense and can be included with your other deductible office expenses.
7. The Perfect Business Structure for Your Pharmacy
This is where things get a little bit tricky. Loophole #7 is actually several loopholes in one and it all depends on your business. Not every pharmacy is structured in the same way and not all SHOULD be.
The Tax Cuts and Jobs Act changed the tax brackets for C-corporations to a flat 21% rate, which decreased taxes for most but actually increased them for some small businesses. To balance it all out, they gave a 20% deduction on qualified business income to many pass-through entities, which includes essentially everyone who isn’t a C-corp.
For many, the big decision is whether to go C-corp and take advantage of the new rate or go with something like an LLC and take advantage of the 20% QBI deduction. For pharmacists, this is even trickier.
Professionals like doctors and lawyers have strict limitations on the QBI deduction because they’re considered Specified Service Trades or Businesses (SSTBs). This causes the deduction to phase out and eventually disappear at higher income levels. However, pharmacists have a lot of income not related to directly providing professional advice and service to patients.
Knowing how much of a deduction you may be eligible for and whether it will make more sense the forming a C-corp takes some calculations but it can have a huge impact on your business’ success. Ask your tax advisor to help you figure out the best structure and make sure you’re not leaving money on the table.
If you don’t have a tax advisor, you’re paying way more than you should be. Click here to book your complimentary strategy session with me. https://go.oncehub.com/BassamMustafa