Tax Planning Strategies for Optometrists Owning Their Own Practices

In the realm of optometry, clarity and precision are not just elements of vision care — they are also crucial in the financial management of your practice. As an optometrist owning your own practice, understanding and implementing effective tax planning strategies can significantly impact your bottom line. The complexities of tax law may seem daunting, but with a proactive approach, a trusted advisory team, and strategic decision-making, substantial tax savings can be realized. These savings can then be reinvested into your business, enhancing patient care and the overall patient experience.

While some ODs may be well versed in the basics of financial planning, the following tax strategies offer a deeper insight into optimizing your tax position, irrespective of your familiarity with the nuances of tax law.

Maximize Deductions Through Strategic Depreciation
Optometry practice owners face the critical decision of how to depreciate expensive equipment purchases. The choice between taking accelerated depreciation (such as Section 179 or bonus depreciation) versus opting for the straight-line method can significantly influence your practice’s tax liability.

Accelerated depreciation methods allow for larger deductions in the early years of an asset’s life, offering a potentially sizeable tax break upon the purchase of new equipment. This approach can be particularly advantageous during high-income years, effectively reducing your taxable income and tax bill. However, it’s essential to consider the implications for future tax years, as accelerated methods front-load deductions, leaving fewer expenses to offset income later.

Conversely, straight-line depreciation spreads the cost evenly over the asset’s useful life, providing a stable, predictable deduction each year. This method may benefit practices anticipating consistent revenue growth.

Choosing the appropriate depreciation method requires a forward-looking analysis of your practice’s financial projections and growth plans. Consulting with a financial advisor knowledgeable about optometry practices can ensure that your depreciation strategy aligns with your long-term financial goals.

Leverage Retirement Plan Contributions with a Safe Harbor 401(k)
Implementing a retirement plan, such as a safe harbor 401(k), can offer tax benefits while promoting financial security for both you and your employees. A safe harbor 401(k) plan satisfies certain IRS non-discrimination tests, ensuring that contributions benefit a broad range of employees. This plan requires the practice to make either matching or non-elective contributions on behalf of employees, encouraging widespread participation.

The SECURE Act 2.0 introduced enhancements to retirement plans, including increased tax credits for small businesses establishing new plans. Practices without an existing retirement plan may be eligible for up to $5,000 per year in tax credits for the first three years to offset setup costs, plus an additional $1,000 per year for including automatic enrollment features.

These provisions make establishing a safe harbor 401(k) plan more appealing and financially feasible for optometry practices, providing a dual benefit of tax savings and a robust employee benefits package.

Health Insurance Deductions and Health Savings Accounts (HSAs)
S-corporation owners can deduct health insurance premiums for themselves and their employees, a measure that can lead to meaningful tax savings. Correctly handling the payment and reporting of these premiums is crucial to ensure they qualify as deductible expenses.

Furthermore, Health Savings Accounts (HSAs), associated with high-deductible health plans, offer a triple tax advantage: contributions are tax-deductible, the growth of funds is tax free, and withdrawals for qualified medical expenses are not taxed. Contributing to employees’ HSAs can enhance your practice’s benefits package, supporting employee retention and tax-efficient health care spending.

Implementing a Cafeteria Plan in Your Practice
A cafeteria plan allows employees to pay for eligible benefit expenses with pre-tax dollars, reducing taxable income for both the employee and employer. For optometry practices, this translates into lower payroll taxes (for both employee and employer) and a more attractive employee benefits package. While incorporating options such as health insurance, dependent care assistance, and HSAs are the common options, a practice can also allow benefits such as pet insurance, pet care, adoption assistance, legal plans, and other fringe benefits to be accessed through a cafeteria plan. In an increasingly competitive environment to attract and retain talent, all of these options can provide significant tax savings and enhance job satisfaction.

Consider Electing S-Corporation Status
For optometry practice owners operating as sole proprietors or in partnerships, considering the election of S-corporation status could lead to significant tax savings. An S-corporation is a special tax status granted by the IRS that allows businesses to pass income directly to shareholders without being subject to corporate income tax rates and circumnavigating the ever-dreaded “double taxation” on corporate profits. This structure can be particularly beneficial for optometrists for several reasons.

Firstly, it separates the owner’s salary from the practice’s profits, which may lead to tax savings on self-employment taxes. Only the salary paid to the owner-employee is subject to FICA taxes, while the remaining profits distributed as dividends are not. However, it’s crucial to ensure that the salary is reasonable for the work performed to comply with IRS guidelines.

Secondly, S-corporation status provides the opportunity for more strategic tax planning regarding distributions and compensation, potentially lowering the overall tax burden. Moreover, this status may offer liability protection, separating the personal assets of the shareholders from the business’s debts and liabilities.

Planning is Key
Effective tax planning is integral to the success and financial health of optometry practices. By employing strategies such as strategic depreciation, leveraging retirement contributions, optimizing health-related deductions, implementing cafeteria plans, and considering S-corporation status, optometry practice owners can achieve significant tax savings. These strategies not only benefit the practice financially but also enhance the personal well-being of the owner and employees.

Consulting with financial and tax professionals who specialize in working with practice owners can provide invaluable guidance, helping to tailor these strategies to your practice’s unique needs. As tax laws continue to evolve, staying informed and proactive in your tax and financial planning efforts will ensure your practice’s ongoing success and growth while also helping you keep more of the revenue that the practice produces.