By the time December rolls around, don’t feel bad if tax planning for your therapy practice is the last thing on your mind.
Even for busy small business owners, the holidays are usually a time to rest, enjoy time with family and friends, and prepare for the New Year ahead.
But taking a few simple steps now to get your business organized could significantly lower your bill come tax season.
So think of end-of-year tax planning as a delayed gift to yourself. Here are six moves you can make now to enjoy the benefits come tax season.
Deduct startup costs if your practice is new
If you started your practice this year, you can lower your tax bill by deducting startup expenses.
So long as your total startup expenses totaled less than $50,000, you can deduct up to $5,000 of the money you spent getting your therapy practice up and running.
That includes expenses like:
- Lawyer and accountant fees
- Marketing consultant fees
- The cost of doing your own market research (e.g. accessing publications or databases)
- The cost of finding an office space and leasing it
- The cost of furnishing and equipping your office
- Wage or salaries paid to staff members (an admin assistant, for instance) while you trained them
- The cost of advertising your practice prior to opening
You can also deduct expenses like fees paid to form an LLC or register a name for your practice. For a deeper dive, check out our guide to deducting start-up fees for your therapy practice.
Clean up your bad debt
In a business context, “bad debt” doesn’t refer to a Christmas credit card hangover, or that $200 Dutch oven you bought during the first wave of COVID when you thought you’d get really into baking sourdough.
Bad debt, in this case, is money you’re unable to collect from those who owe it to you. That could be a client who moved away and conveniently changed their phone number before paying the last bill you sent them. Or it could be a trendy new startup that brought you in for a series of mental health workshops, then lost funding and went under before they could pay your invoice.
Whatever the case, it’s important to differentiate between two types of bad debt and two ways of cleaning it up:
- Bad debt you’ve already reported as income on a prior tax return
- Bad debt in the form of unpaid invoices that you have not yet reported as income
In the first case, if you review your books and discover bad debt you recorded as income, you could deduct the cost of the debt this year even if you’ve already paid income tax on it for a prior year. Learn more about the bad debt deduction.
In the second case, there’s no need to deduct the cost of the debt on your tax return. But you do need to go back and write off the debt if you’ve recorded it as income on the books. Otherwise, you run the risk of reporting income you never earned. To write bad debt off the books, use the direct write-off method.
Redirect income to HSAs and IRAs
Contributing to health savings accounts (HSAs) and individual retirement accounts (IRAs) reduces your tax burden for the current year, while allowing you to put aside money for retirement or unforeseen medical expenses.
For 2023, the maximum contributions are:
- HSA: $3,850 for individuals ($4,850 if you’re 55+), or $7,750 for families ($8,750 if you’re 55+). Besides allowing you to defer tax payments, some HSAs also allow you to make tax-free contributions.
- IRA: $6,500 ($7,500 if you're 55+). If you have a spouse and they have an employer retirement plan, however, it could limit how much you’re able to deduct from taxes using your own IRA.
The deadline for both types of contributions is April 15, 2024. For more, read our article on how to choose a retirement plan for your therapy practice.
Defer some of your income
The less income you earn this year, the less income tax you’ll have to pay on it.
Don’t get too excited—any income you earn in the New Year will still get taxed. But if your tax bill for the current year looks like it’ll be a big one, deferring income can prevent it from getting any bigger.
First, determine whether deferring income will benefit you. Total up your financial statements and try to get a ballpark figure for what you’ve earned so far this year.
Compare that with last year’s income. Are you ahead? If so—and if you’ve been paying quarterly estimated taxes for this year based on last year’s figures—it could mean you owe the IRS extra cash once you file your taxes.
If that’s the case, it’s time to look at deferring income. That’s easiest to do if you use the cash basis method of accounting.
Quick refresher: Cash basis accounting tracks revenue the moment you earn it, ie. whenever you have cash in hand. In contrast, accrual accounting tracks revenue when you bill for it (that is, when you send a client an invoice).
If you use the accrual method, you’re limited in your ability to defer income (short of rescheduling clients to come see you in January rather than December).
If you use cash basis accounting, on the other hand, you have more flexibility. For instance, instead of immediately invoicing clients you see in the last two weeks of December, you could invoice them January 1st. Then, when you’re paid, the income won’t appear on your tax return for the current year.
(In the event you take this approach, check with your clients ahead of time to make sure the delayed billing schedule works for them.)
There may be ways to defer income from other revenue streams as well. For instance, that guest blog post you wrote for a mental health website, or that editing work you did on a colleague’s book, are both prime candidates for deferral.
Just be sure to use your best judgment, and communicate clearly with the people or businesses you’re billing. They may be eager to pay off as many expenses as possible before the end of the year—for reasons explained in the next tip.
Make major purchases before year-end
If you have the cash to cover a major business purchase before the end of the year, and it’s a purchase you’d be making next year anyway, go ahead and do it now.
Every deductible expense you incur this year lowers your tax bill. That’s a good thing if you’re trying to reduce your income and avoid paying any extra cash to the IRS once you file.
(Keep in mind, though, that you are only able to deduct—at most—the full amount of tax you would pay on revenue that you would otherwise spend on a deductible business expense. The full value of the expense is not deductible. If you plan to spend money to save money, do it judiciously.)
This is a time-tested strategy used by businesses both large and small. It’s most effective for companies with a lot of inventory, or ones that rely on frequently upgrading or repairing equipment. On first glance, it may be hard to see how your therapy practice can take advantage of it.
But think ahead. You’ve got a whole 12 months, comprising the coming calendar year, for spending money. What are some expenses that might come your way?
For instance, maybe the laptop you use for online client appointments has started to make scary whining sounds in the last few months. You know it’ll be time for an upgrade soon; how likely is it you’ll upgrade next year?
Or maybe the summer heat in your office was brutal this year, and you’ve already resolved to upgrade your air conditioner before next summer. Why wait until May when you can make the purchase now?
Best of all, Boxing Week could be your chance to score deals on items your practice can use. For instance, the $1,000 you’d budgeted for a new laptop may get you a more powerful model that would normally cost $1,600. A little thoughtful consumerism now could lower your tax bill in the future.
Set yourself up for better expense tracking in 2024
Good bookkeeping helps you track and categorize all your expenses. Combined with careful recordkeeping in the form of saved and organized receipts, that sets you up to report as many deductible expenses as possible on your tax return.
If you don’t have a solid bookkeeping solution in place—for instance, if you do your own bookkeeping, but you keep falling behind—then December is a smart time to get a new system set up.
That way, when January 1st arrives, your new bookkeeping system is ready to track every expense of the financial year from Day One. There’s no rushing to catch up and get organized mid-year, and you’ll be on track to take advantage of as many deductions as possible.
For help, check out our article on why bookkeeping is important for therapists.
Excited for tax season? Just us?
Grab out our complete tax season checklist for therapists, so you’ll be ready to get organized and file as soon as the New Year arrives.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.