|
New Articles
  |
December 23, 2009 | dentalproductsreport.com Tax Deferrals:
Examples of actions to create deferrals During the course of the year, the dentist has meetings with financial advisors, accountants and others for input regarding wealth management, tax advice and legal matters. Decisions are made concerning the acquisition of equipment, real estate, retirement planning and other financial questions. When equipment is purchased, there is an immediate tax deferral. Depreciation guidelines allow the dentist to deduct the cost of the equipment over various time frames. If the tax that is not paid because of the equipment acquisition is invested, it will create additional income that can be used to pay the tax when it comes due and also to produce a profit. The key to tax deferral and the accumulation of income from it, is the length of time the tax payment is delayed and the rate of return on those funds., How long is the tax deferred from the acquisition of equipment? What guideline life is used for depreciation expense? It can be from one year to seven or longer in certain circumstances. Another action to create a deferral is the purchase of commercial real estate. The guideline life for real estate depreciation is a long term of up to thirty nine years. This affords a small amount of deferred tax per year. There is another relatively new method of depreciation known as “cost segregation depreciation.” This method allows the components of the building to be depreciated such as doors, windows, plumbing, heating and air conditioning units and wall partitions. These all have much shorter lives than thirty nine years and create much quicker and larger expense amounts allocated to depreciation. This then allows larger tax deferrals immediately that can be invested. This creates more income from the invested funds that were created by the tax deferral. Tax deferrals based on retirement plan designs The creation of an employer sponsored qualified retirement plan can allow an enormous deferral on a consistent basis. Taxes are deferred year after year. The ability to invest these funds occurs constantly and the tax on the income earned is deferred as well until it is withdrawn from the account. Based on one’s age and the continuation of payments into the retirement plan, an enormous amount can be accumulated from a long term deferred payment. The common thread The commonality of these examples of tax deferral is that funds are created by not paying tax today but by paying it at a later date. The length of the deferral creates the ability to keep the payment of the current tax earning income until an event occurs when the tax must be paid. When that time comes, the earnings on the deferral will pay a large portion of that tax and there should be funds left over to retain. Rules to remember With each form of deferral there is an amount of time available before the tax that has been deferred will be due. Equipment typically has a shorter deferred term for the tax payment than real estate. Employer sponsored qualified retirement plans can have the longest term of all based on the length of time the investments are held until their withdrawal. If the dentist remembers the “rule of seventy two,” it will assist in guiding the result of how much the tax deferral is worth. Any funds invested will double in value over a specific number of years by using this rule. If the interest rate being earned by the investment is divided into seventy two, that result gives the number of years it takes to double your money using a compounded effect. This does not take into account any tax on that income. For example, if you can earn six percent, you divide six into seventy two which results in the answer of twelve. That means that at six percent, it will take twelve years to double your money without any tax effect. Of course if the deferred tax is invested in a qualified employer sponsored retirement plan, there is no tax until the funds are withdrawn so that form of deferral could be the best. Some dentists do not invest the deferred tax at all. They spend it. Of course that type of situation is the worst of all because the deferred tax will be due at a certain point. If the funds are spent and there is no money available to pay the tax when it comes due, the dentist has gotten into a terrible situation and probably can’t remember why the tax is due in such a large amount when combined with the current year’s tax. Follow a solid and consistent approach When deferring your tax, it is of the utmost importance to speak to professionals who not only understand these concepts, but who also can impart their wisdom to the dentist so that the investment of the deferred tax liability is a reality and the funds are not spent. Remember that there is almost no such thing as “saving” the tax that is not being paid today. The deferral is the goal and key to the accumulation of assets and the wise investment of those funds that will ensure the ability to pay the tax later and to profit from the transaction in the long term. Meet with a CPA with experience in the representation of dentists and with knowledge in the field of tax planning. Bruce Bryen is a partner in The Snyder Group and managing partner for Bryen & Bryen LLP, Certified Public Accountants. Based in New Jersey, Mr. Bryen specializes in deferred compensation such as retirement plans, income and estate tax planning, the determination of the proper organizational format, asset protection and structuring loan packages for presentation to financial institutions. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness. Contact him at 800-988-5674, ext. 112.
|
|
Printer Friendly
Email Article
Related Articles