MDTAXES March 2002 newsletter on personal income taxes for health care professionals

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Are you reimbursed for all of your professional expenses? If not, deducting your business expenses might really help you cut down your tax bill.

So what types of expenses are deductible? According to the IRS, to be deductible, an expenditure must be both "ordinary" and "necessary" in connection with your profession. The IRS defines "ordinary" as common and accepted in a particular profession and "necessary" as helpful and appropriate for a particular profession. Here's a list of 17 business related expenditures commonly incurred by young health care professionals:

Automobile expenses * Beepers and pagers * Books/library * Cellular telephones * Computer purchases * Education, examinations & licenses * Equipment & instruments * Job search * Malpractice insurance * Meals & entertainment * Parking & tolls * Professional dues, journals & subscriptions * Psychoanalysis as required part of training * Supplies * Temporary Job Assignments * Travel & lodging * Uniforms & cleaning

How you'll deduct your business expenses depends on how you were compensated during the year. If you earned your money as an independent contractor, you'll claim your professional expenses directly against your independent contractor income on the Schedule C. Otherwise, you'll deduct your professional expenses as a miscellaneous itemized deduction on the Schedule A. To do so, you'll need to first complete a Form 2106, Unreimbursed Employee Business Expenses. And remember, your miscellaneous itemized deductions are only deductible to the extent they exceed 2% of your income, so make sure to time those payments to fall in years that you'll be over the threshold.

Don't forget about the home office deduction. If you use a portion of your home, regularly and exclusively, in connection with your trade or business, you might be eligible to claim the home office deduction. People who don't own their own homes stand to benefit the most, since rent isn't otherwise deductible on your federal income tax return.

Professional
Expense

Deductible

Non-deductible

Automobile expenses

The portion of automobile expenses attributable to traveling between two work places or between your principal residence and a temporary job site.

The portion of automobile expenses incurred while commuting between your principal residence and a regular place of business

Beepers and pagers

The rental fees paid by you for beepers and pagers used in connection with your job

Any costs associated with the personal use of these items

Books/library

Depreciation based on either the cost of books purchased during the year or the fair market value of your library purchased in prior years and placed into business use during the current year

Any purchase of books not related to your profession

Cellular telephone

The business use portion of the monthly bill and depreciation expense based on the business portion of the cost of the cellular telephone

Any portion of the cost of the cellular phone and the monthly bill relating to personal use

Computer purchases

Depreciation of the business use percent of any computer or peripheral purchased as a requirement of employment AND for the benefit of the employer

Any computer or peripheral not specifically purchased as a requirement of employment OR for the benefit of the employer.

Education, examinations, & licenses

Expenses incurred that are required as part of your employment AND maintain or improve professional skills. Also, save up to $1,000 in taxes with the Lifetime Learning tax credit, if you any tuition paid during the year, subject to income limitations.

Expenses incurred that prepare or qualify a person for a new trade or business

Equipment & instruments

Depreciation expense based on either the cost of items purchased during the year or the fair market value of equipment purchased in prior years and placed into business use during the current year

The purchase of equipment and instruments not associated with your profession.

Insurance

Malpractice insurance and insurance paid on business assets, and 60% of your health insurance premiums if you're self-employed.

Life & disability insurance. Health insurance premiums paid by individuals who are not self-employed.

Interest on school loans

For 2002, up to $2,500 of student loan interest, depending on your income. Also, interest paid in connection with a home equity loan used to pay off student loans.

All other student loan interest paid.

Job search

All expenses associated with finding a new position in your current trade or business

Expenses associated with finding your first job or a job in a new trade or business

Meals & entertainment

50% of the cost of a meal when there is either a specific business purpose in connection with the meal or while temporarily away on business

Meals eaten while on call at a hospital in the general vicinity of your residence as well as all other non-business meals

Parking & tolls

Parking and tolls incurred in connection with traveling between two different workplaces or between your principal residence and a temporary job site

Parking and tolls incurred in connection with commuting between your principal residence and a regular workplace

Professionals dues, journals & subscriptions

Fees paid to join professional organizations or to subscribe to their journals

Dues paid to business, social or athletic clubs

Supplies

Supplies, such as slides for presentations, that are required in connection with your employment

Supplies which do not fall within the definition of being "ordinary" and "necessary" for a professional in your field

Temporary job assignments

All travel and lodging, as well as 50% of the cost of the meals, incurred during a job rotation outside of the general vicinity of your residence if the rotation will last for less that 1 year and you intend to return to where you lived before the rotation.

Any expense associated with a job rotation outside of the general vicinity of your residence which will last for more than 1 year or for an undetermined amount of time OR if you do not intend to return to where you lived prior to the rotation.

Travel & lodging

Most travel and lodging expenses incurred while outside of the general vicinity of your residence in connection with an activity that is deductible

Travel and lodging expenses incurred when the primary purpose of the trip is not business related

Uniforms & cleaning

The cost of purchasing and cleaning clothing, such as labcoats and scrubs, required by your employer and not considered "everyday street clothing"

Items such as suits, shirts, ties and wristwatches because they fit the description of "everyday street clothing"

Check out our Directory of Affiliated Offices to find a CPA near you who specializes in the tax planning and preparation for young health care professionals.

Do you use your car for work. If you plan to claim a deduction for automobile expenses, here's the basics:

For 2001, you can base your deduction on the standard mileage rate of $.345 per business mile driven, or on actual expenses incurred. Additional information about claiming an automobile deduction can be found in the IRS Publication 917, available at www.irs.gov.

Let's take a look at an example of a person who drives their car 4,000 business miles and 6,000 personal miles during the year. The deduction based on the standard mileage rate would be $1,380 (4,000 * $.345). The deduction based on actual expenses would be 40% of the cost of gas, insurance, repairs, and other expenses, plus 40% of either the lease payment or the depreciation of the car.

Generally, unless you drive the car very few miles, and mostly for business, the standard mileage rate yields the highest deduction. But make sure to work through the numbers to see which method will give you the highest deduction.

If you use your car for other purposes, you might be entitled to a deduction as well. The use of an automobile in connection with a charitable activity is deductible at a rate of $.14 per mile and should be reported with other charitable contributions as an itemized deduction of the Schedule A. Any mileage incurred as part of a qualified move is deductible at a rate of twelve cents per mile and should be reported on a Form 3903. The use of an automobile for medical related reasons is also deductible at a rate of twelve cents per mile and should be reported with all other medical expenses on the Schedule A.