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Federal Income Tax for 1966: a checklist for dentists
Federal Income Tax for 1966: a checklist for dentists
■A dentist in private practice reports his profes sional income and expenses on a separate Schedule C “Schedule of Profit (and Loss) From Business or Profession.” The net profit shown on Schedule C is then carried over to Form 1040 where the dentist may then take his personal deductions or elect to take the standard deduction. All business deductions are set forth on Schedule C, and all personal deductions on Form 1040 unless the den tist takes the standard deduction in lieu of his ac tual personal deductions. Recent changes in tax law
■Dividend Exclusions: Prior to the 1964 amend ments individuals could exclude from gross income the first $50 of dividend income. For 1966 returns, the dividend exclusions are $100. ■Some State and Local Taxes No Longer De ductible: The following state and local taxes are not deductible on 1966 returns: 78
—Taxes on cigarettes, tobacco and alcoholic beverages. —Driver’s license fees. — Registration fees for motor vehicles. — Poll taxes. ■Personal Casualty and Theft Losses: The de ductibility of personal casualty and theft losses is now limited to the amount of each loss in excess of $100. This does not apply to losses incurred in a taxpayer’s trade or business. ■Charitable Contributions: An additional 10 per cent charitable contribution deduction is allowed for contributions to any organization to which the basic 20% limitation applies, if the organization is publicly or govemmentally supported. ■Medical Expenses for Medicines and Drugs: Persons aged 65 have lost their previous right to deduct medical, dental, and drug expenses in full on their federal income tax return. They can now deduct only the excess over 3 percent of income for medical and dental bills and 1 percent for drugs.
■Travel Expenses: The 1964 amendments rein stated the pre-1963 policy for travel within the United States, which policy permits deduction of the full amount of traveling expenses incurred on trips which are primarily for business purposes. The rule for foreign travel remains the same as in 1963; for example, the traveling expenses (includ ing meals and lodging) of a combined businesspersonal trip, have to be allocated between the ex penses for business and expenses for personal rea sons, and only the business portion is deductible. Taxable income
Income from the following sources is taxable as in come from the practice of a profession, and as such, must be reported on Schedule C. —Professional fees. —Profits from a professional partnership. —Honorariums for speeches and writings. —Referral fees (unethical but still taxable). —Other. Depending on whether they arise from the den tist’s profession, the following are reported on either Schedule C or Form 1040. —Contest prizes. —Rents and royalties. —Interest and dividends. Business expenses
Business expenses are shown on Schedule C. A dentist, like anyone engaged in a business, is entitled to deduct all ordinary and necessary ex penses incurred in the practice of his profession such as: —Accountant’s fees. —Auto expenses to extent used for professional purposes; not included is commuting to office. —Books if useful life is short; long-life requires depreciation. —Collection fees. —Fees to professional societies; does not include contributions to political action committees. —Dental meeting costs; includes registration fees, room, meals, transportation, tips. If the period away from home is not for more than one day, ex penses for meals are not deductible. —Costs of defending a professional liability lawsuit. —Dues in dental societies and other organiza tions for a business purpose.
—Educational costs (see Educational Expense). —Entertainment (see Entertainment Expense). —Fire, casualty and theft losses to extent not compensated by insurance. —Gifts to employees and others for business reasons. — Instruments with life of less than one year. —Premiums for such policies as professional liability, premises liability, and fire and theft in surance on professional property. —Interest on indebtedness arising out of pro fessional practice. (Interest on personal indebted ness is deductible on Form 1040.) — Laundry costs of linens, uniforms, and so on, connected with practice. —Legal fees in connection with professional practice. —License and reregistration fees necessary to maintain practice. —Magazines and newspapers for waiting room. —Maintenance of office, including utilities. —Office supplies, bookkeeping supplies. —Professional journals and periodicals. —Rental space for office. —Repairs to equipment. —Utilities and other expenses of upkeep of den tal office. —Salaries to assistants, hygienists, and so on, including contributions to employee pension plans. —Taxes on personal and real property used in professional practice. 79
—Telephone and telephone answering service. —Traveling expenses; for example, visits to patients, attending dental meetings, trips to hospi tals. —Surgical gowns or other “uniforms.” —Depreciation on long-life equipment, furni ture, books, etc. ■ Wife’s Travel Expenses: A husband may deduct his wife’s travel expenses if he can prove that his wife performed services on the trip which were di rectly attributable to, and necessary to, the conduct of his business on the trip. The Internal Revenue Service applies a “necessity of presence test” and it can be expected that deductions for a wife’s at tendance at a dental meeting will be denied. The tax courts have indicated that the performance of some incidental services on the trip does not es tablish that the wife’s presence served a bona fide business purpose. ■Contributions to Pension and Profit Sharing Plans: Contributions to an employees pension or retirement plan constitute an expense of doing business and are deductible. Tax returns for 1966 may include deductions for the dentist’s contribu tions to his own retirement plan if the retirement plan has been prior-approved and the deductions conform to the Self-Employed Individuals Tax Re tirement Act of 1962, sometimes known as the “Keogh Law.” The $2,500 limitation still remains. ■Educational Expense: Educational expenses are deductible as ordinary and necessary business ex penses of a dentist when the education is under taken primarily to maintain or improve existing skills. Allowable deduction is for tuition, fees and travel expenses. If the purpose of the educational program is to acquire new skills, then it is likely that the internal revenue service will find there is no deduction. ■Entertainment Expense: A dentist may deduct the costs of entertainment, provided that he can establish that the expense was “directly related” to, and “associated”, with, his practice and that the entertainment occurred directly before or after a substantial and bona fide business discussion. The dentist must show something more than that he expected to get referrals or patients as a result of the entertainment. ■Professional Office and Residence in One Build ing: All expenses which can be allocated to the business use can be deducted as business expenses. 80
The allocation must “clearly reflect income,” and if it does, the method of allocation is acceptable. ■Depreciation: The dentist can use any of several methods of computing depreciation and elect the one most beneficial to him. Regardless of the method used, the dentist may deduct in the year of acquisition 20 percent of the cost of the proper ty which has a life of six years or more. ■Rental Costs: Equipment rental costs are de ductible business expenses. If the equipment is subsequently purchased from the lessor and rent als applied as part of the sales prices, the rental costs are not deductible. In such instances the total cost of the equipment is either depreciated or de ducted as an expense, depending on the expected life of the equipment. ■Dues to Social, Athletic and Sporting Clubs: It is necessary that the club be used primarily for business purposes before any dues or fees will be deductible. And then, only that portion allotted to business use will be allowed. ■Lobbying Expenses: Contributions to candi dates, political parties and political action com mittees are nondeductible. Dentists may take de ductions for certain types of legislative activities: for example, costs of appearances before or com munications with legislative bodies, and commun ications of information to a dental society. All ex penses must be in connection with existing or pro
posed legislation which is of direct interest to the dentist. ■Reimbursed Expenses: A dentist serving as a committee member or in some other official ca pacity wherein he is reimbursed by the dental so ciety while away from his practice must report this sum as income in certain cases. If the reimburse ment is equivalent to actual expenses, then it need not be included in the tax return. If reimbursement is in excess of, or less than actual expenses the total amount of the reimbursement must be added to gross income and then all actual expenses may be deducted. Declaration of estimated tax
In general, an individual is required to file a dec laration of estimated tax, Form 1040ES, and to make quarterly payments in advance of filing the annual income tax return if his total expected tax exceeds his withholding by $40 or more. Dentists who are self-employed must file a declaration if their expected income, not subject to withholding, is more than $200 for the forthcoming year.
Personal deductions
These are deductions personal to the dentist as an individual as opposed to deductions incurred in the course of his professional practice. The follow ing checklist is applicable to all taxpayers who elect to itemize their deductions rather than take the standard deduction. A dentist is entitled to take the standard deduction even after he has deducted on Schedule C the ordinary and necessary business expenses. —Charitable contributions. —Interest expense. —State and local taxes, including real and per sonal property taxes, sales tax and state income tax. —Medical and dental expenses, including med icines and drugs and costs of travel to a doctor or hospital. — Medical appliances, including hearing aids, prosthetic appliances, orthopedic shoes, and so on. —Hospitalization and insurance premiums for medical insurance. —Casualties and theft losses. —Costs of preparing income tax return. 81
■A dentist in private practice reports his profes sional income and expenses on a separate Schedule C “Schedule of Profit (and Loss) From Business or Profession.” The net profit shown on Schedule C is then carried over to Form 1040 where the dentist may then take his personal deductions or elect to take the standard deduction. All business deductions are set forth on Schedule C, and all personal deductions on Form 1040 unless the den tist takes the standard deduction in lieu of his ac tual personal deductions. Recent changes in tax law
■Dividend Exclusions: Prior to the 1964 amend ments individuals could exclude from gross income the first $50 of dividend income. For 1966 returns, the dividend exclusions are $100. ■Some State and Local Taxes No Longer De ductible: The following state and local taxes are not deductible on 1966 returns: 78
—Taxes on cigarettes, tobacco and alcoholic beverages. —Driver’s license fees. — Registration fees for motor vehicles. — Poll taxes. ■Personal Casualty and Theft Losses: The de ductibility of personal casualty and theft losses is now limited to the amount of each loss in excess of $100. This does not apply to losses incurred in a taxpayer’s trade or business. ■Charitable Contributions: An additional 10 per cent charitable contribution deduction is allowed for contributions to any organization to which the basic 20% limitation applies, if the organization is publicly or govemmentally supported. ■Medical Expenses for Medicines and Drugs: Persons aged 65 have lost their previous right to deduct medical, dental, and drug expenses in full on their federal income tax return. They can now deduct only the excess over 3 percent of income for medical and dental bills and 1 percent for drugs.
■Travel Expenses: The 1964 amendments rein stated the pre-1963 policy for travel within the United States, which policy permits deduction of the full amount of traveling expenses incurred on trips which are primarily for business purposes. The rule for foreign travel remains the same as in 1963; for example, the traveling expenses (includ ing meals and lodging) of a combined businesspersonal trip, have to be allocated between the ex penses for business and expenses for personal rea sons, and only the business portion is deductible. Taxable income
Income from the following sources is taxable as in come from the practice of a profession, and as such, must be reported on Schedule C. —Professional fees. —Profits from a professional partnership. —Honorariums for speeches and writings. —Referral fees (unethical but still taxable). —Other. Depending on whether they arise from the den tist’s profession, the following are reported on either Schedule C or Form 1040. —Contest prizes. —Rents and royalties. —Interest and dividends. Business expenses
Business expenses are shown on Schedule C. A dentist, like anyone engaged in a business, is entitled to deduct all ordinary and necessary ex penses incurred in the practice of his profession such as: —Accountant’s fees. —Auto expenses to extent used for professional purposes; not included is commuting to office. —Books if useful life is short; long-life requires depreciation. —Collection fees. —Fees to professional societies; does not include contributions to political action committees. —Dental meeting costs; includes registration fees, room, meals, transportation, tips. If the period away from home is not for more than one day, ex penses for meals are not deductible. —Costs of defending a professional liability lawsuit. —Dues in dental societies and other organiza tions for a business purpose.
—Educational costs (see Educational Expense). —Entertainment (see Entertainment Expense). —Fire, casualty and theft losses to extent not compensated by insurance. —Gifts to employees and others for business reasons. — Instruments with life of less than one year. —Premiums for such policies as professional liability, premises liability, and fire and theft in surance on professional property. —Interest on indebtedness arising out of pro fessional practice. (Interest on personal indebted ness is deductible on Form 1040.) — Laundry costs of linens, uniforms, and so on, connected with practice. —Legal fees in connection with professional practice. —License and reregistration fees necessary to maintain practice. —Magazines and newspapers for waiting room. —Maintenance of office, including utilities. —Office supplies, bookkeeping supplies. —Professional journals and periodicals. —Rental space for office. —Repairs to equipment. —Utilities and other expenses of upkeep of den tal office. —Salaries to assistants, hygienists, and so on, including contributions to employee pension plans. —Taxes on personal and real property used in professional practice. 79
—Telephone and telephone answering service. —Traveling expenses; for example, visits to patients, attending dental meetings, trips to hospi tals. —Surgical gowns or other “uniforms.” —Depreciation on long-life equipment, furni ture, books, etc. ■ Wife’s Travel Expenses: A husband may deduct his wife’s travel expenses if he can prove that his wife performed services on the trip which were di rectly attributable to, and necessary to, the conduct of his business on the trip. The Internal Revenue Service applies a “necessity of presence test” and it can be expected that deductions for a wife’s at tendance at a dental meeting will be denied. The tax courts have indicated that the performance of some incidental services on the trip does not es tablish that the wife’s presence served a bona fide business purpose. ■Contributions to Pension and Profit Sharing Plans: Contributions to an employees pension or retirement plan constitute an expense of doing business and are deductible. Tax returns for 1966 may include deductions for the dentist’s contribu tions to his own retirement plan if the retirement plan has been prior-approved and the deductions conform to the Self-Employed Individuals Tax Re tirement Act of 1962, sometimes known as the “Keogh Law.” The $2,500 limitation still remains. ■Educational Expense: Educational expenses are deductible as ordinary and necessary business ex penses of a dentist when the education is under taken primarily to maintain or improve existing skills. Allowable deduction is for tuition, fees and travel expenses. If the purpose of the educational program is to acquire new skills, then it is likely that the internal revenue service will find there is no deduction. ■Entertainment Expense: A dentist may deduct the costs of entertainment, provided that he can establish that the expense was “directly related” to, and “associated”, with, his practice and that the entertainment occurred directly before or after a substantial and bona fide business discussion. The dentist must show something more than that he expected to get referrals or patients as a result of the entertainment. ■Professional Office and Residence in One Build ing: All expenses which can be allocated to the business use can be deducted as business expenses. 80
The allocation must “clearly reflect income,” and if it does, the method of allocation is acceptable. ■Depreciation: The dentist can use any of several methods of computing depreciation and elect the one most beneficial to him. Regardless of the method used, the dentist may deduct in the year of acquisition 20 percent of the cost of the proper ty which has a life of six years or more. ■Rental Costs: Equipment rental costs are de ductible business expenses. If the equipment is subsequently purchased from the lessor and rent als applied as part of the sales prices, the rental costs are not deductible. In such instances the total cost of the equipment is either depreciated or de ducted as an expense, depending on the expected life of the equipment. ■Dues to Social, Athletic and Sporting Clubs: It is necessary that the club be used primarily for business purposes before any dues or fees will be deductible. And then, only that portion allotted to business use will be allowed. ■Lobbying Expenses: Contributions to candi dates, political parties and political action com mittees are nondeductible. Dentists may take de ductions for certain types of legislative activities: for example, costs of appearances before or com munications with legislative bodies, and commun ications of information to a dental society. All ex penses must be in connection with existing or pro
posed legislation which is of direct interest to the dentist. ■Reimbursed Expenses: A dentist serving as a committee member or in some other official ca pacity wherein he is reimbursed by the dental so ciety while away from his practice must report this sum as income in certain cases. If the reimburse ment is equivalent to actual expenses, then it need not be included in the tax return. If reimbursement is in excess of, or less than actual expenses the total amount of the reimbursement must be added to gross income and then all actual expenses may be deducted. Declaration of estimated tax
In general, an individual is required to file a dec laration of estimated tax, Form 1040ES, and to make quarterly payments in advance of filing the annual income tax return if his total expected tax exceeds his withholding by $40 or more. Dentists who are self-employed must file a declaration if their expected income, not subject to withholding, is more than $200 for the forthcoming year.
Personal deductions
These are deductions personal to the dentist as an individual as opposed to deductions incurred in the course of his professional practice. The follow ing checklist is applicable to all taxpayers who elect to itemize their deductions rather than take the standard deduction. A dentist is entitled to take the standard deduction even after he has deducted on Schedule C the ordinary and necessary business expenses. —Charitable contributions. —Interest expense. —State and local taxes, including real and per sonal property taxes, sales tax and state income tax. —Medical and dental expenses, including med icines and drugs and costs of travel to a doctor or hospital. — Medical appliances, including hearing aids, prosthetic appliances, orthopedic shoes, and so on. —Hospitalization and insurance premiums for medical insurance. —Casualties and theft losses. —Costs of preparing income tax return. 81