Year-end checklist helps 2003 preparation
Gift lists are the hallmark of the holiday season and the well-organized mind. Shopping duties, generally anticipated as a fun activity, tend to quickly be completed as compared to other lists that occur at year-end. Issues of business management are procrastinated to a much greater extent.
Important management tasks may be overlooked or delayed perpetually in the flurry of holiday planning at year-end. Although we cannot help you with your holiday gift list, we can provide some bullet points of practice management and tax-planning issues that should be considered before year-end. This list will help you organize the financial side of your life before the bell tolls on Dec. 31.
Review petty cash box reconciliation reports. The box should be replenished on Dec. 31 so an accurate accounting of all practice expenses can be made through the end of the year.
Evaluate checking and savings accounts. Many practices maintain multiple accounts. Have you reviewed all bank statements during the course of the year? Are regular reconciliations occurring? Evaluate large account balances for possible changes to interest-bearing accounts or alternative investments. Depending on your practice entity format, reducing cash balances at end of year may be part of the tax strategy to be discussed with the practice's accountant.
Whether your practice is cash based or accrual based, now is the time to examine the accounts receivable balance. How have accounts receivable been controlled through the year? Do large amounts in arrears validate a change in collections philosophy and protocol?
For cash-based taxpayers, deferring the last billing in December until late in the month may be an appropriate move so that a substantial portion of December client payments are received in January.
For accrual-based practices, make specific identification of accounts that cannot be collected. Hopefully, bad accounts have been identified on a regular basis and turned over to a collection agency or an attorney after documented pursuit has been made by the practice's in-house collection staff.
By year-end, identify those accounts that have been actively worked and have little probability of collection. Write off these bad accounts and provide details of client names and account amounts to your accountant for deduction on the tax return.
Physical inventory counts should occur throughout the year but obtaining a value for supplies on hand is a must for end-of-year tax reporting.
Current IRS guidelines indicate that substantial supply and inventory amounts on hand at the end of the year cannot be deducted until the latter of when payments for those inventories occur or when they are billed out to clients. Therefore, your accountant will need a fairly accurate accounting of medical supplies that are on hand at end of year that might have already been paid for but cannot be deducted since they have not yet been used in the provision of client services.
Physical inventories give your staff a chance to identify outdated supplies and excess amounts. Send them back to the manufacturer for refund as soon as possible.
Make note of physical storage. How scattered and unsecured have the practice's supplies become? In practices with a long history and scant storage space, supplies may be squirreled away all over the hospital. Out of sight; out of mind. Take the opportunity to find out what you have and consolidate the inventories to the extent possible for the space available.
Annual capital expenditures
For veterinary practices, a significant year-to-year capital reinvestment will be in medical equipment and computer technology. Each year, cumulative purchases should be checked before year-end.
Ask for a detailed computer run of the transactional detail for the year. This could be a Quicken printout of the checking registers. It may be a general ledger by account category.
Review transactional detail for any equipment transactions that might have been overlooked and classed as current expenditures rather than significant improvements, betterments or new equipment purchases.
Sometimes, unknowledgeable bookkeepers will simply expense significant purchases that should be recorded as property purchases, subject to depreciation.
Once you have an accurate assessment of the equipment purchases to date, measure this against the possible Section 179 election deduction limit. For 2002, up to $24,000 of eligible purchases can be expensed.
Additionally, bonus depreciation through the Job Creation Workers' Assistance Act of 2002 provides an allowance equal to 30 percent of the adjusted basis of the qualified property. In other words, through use of Section 179, accelerated depreciation, plus the 30 percent allowance, deductions can be greatly accelerated for assets put into service by year-end.
Discuss with your accountant whether any tax return adjustments need to be made to capture 2001-year bonus depreciation that may have been overlooked because the law did not change until March 2002. Special rules and guidelines have been provided by the Internal Revenue Service since the Act was passed in March 2002 to retroactively account for asset purchases from Sept. 11 through Dec. 31, 2001.
As part of long-range planning, consider envisioned equipment acquisitions for 2003 and 2004. With very low interest rates and bonus depreciation available through Dec. 31, 2004, incentive exists to possibly accelerate longer-term practice equipment needs you see evolving.
Demand for veterinary services is strong despite the recessionary economy; animal owners continue to be willing to pay for services. Logically plan out your practice's technological needs for equipment that will generate additional revenues and/or increase staff efficiencies.
Now is the time to review existing loan documents. What requirements, if any, must be fulfilled to meet bank loan committee requirements? Is loan refinancing in order, because interest rates will continue to be quite favorable? Plan ahead for additional loans based on projected capital required for a practice facelift, equipment acquisition or facility expansion.
Related party loans
When meeting with your accountant, discuss any amounts owed to or from related parties. If loans exist between you and the veterinary practice, then these should be documented and brought up to date. Many times in the course of daily operations, loans are casually made or advances taken from practices. When loans exceed $10,000 in total, a fair rate of interest must be charged on such loans.
Amortization schedules and promissory notes should exist for any loans that have been made to and from related parties. Clearly document any transactions that are intended to be repaid and do not represent a contribution of capital or dividend payment.
Assure that interest amounts have been correctly recorded. Total interest amounts should be tallied and readily available so that Forms 1099-INT (information return for reporting interest payments) can be prepared in a timely fashion after the turn of the year.
Other legal documentation
Now is the time to freshen up other legal documents such as lease agreements and employment contracts.
Review the real estate lease agreements and determine the last time they were updated. Many times, real estate lease agreements exist with those who own the practice, a related party transaction. To the utmost extent possible, such closely held real estate lease agreements should be handled as they would with any outside party. Payments should be timely and in exact accord with the specifications of the document.
If lease agreements are out of date or have expired, now is the time to bring them up-to-date. Incorporate cost of living increases to pass on the implicit fair market value increase of the underlying real estate to the practice entity.
Review equipment leases. Many times, equipment leases will automatically renew. Do not be caught unaware making extra unnecessary lease payments on equipment that should be purchased at conclusion of the lease by formal notification of the company.
Review all employment documents. Are they current? Are any employment agreements with associate veterinarians close to expiration that require renegotiation attention in short order?
Examine the general ledger detail for any evidence of any contract workers beyond those you can name off the top of your head. Many times, during the course of the year, services will be contracted from a variety of individuals, such as computer repairs, lawn service and snow removal, as well as relief veterinarians, attorneys and the typical litany of casual workers.
Once you have identified all potential contract workers, check files to assure that W-9 forms exist for each and every individual. If some are missing, now is the time to pursue them. Little is more frustrating than tracking down contract workers after the turn of the year so that required Form 1099s can be sent disclosing the amounts paid to them during the course of the year.
While you are at it, check employee files. Are all W-4 forms and immigration forms I-9 up-to-date? Keep in mind special rules for employee withholding changes. Marriage, divorce and additional dependents may all require that the employee update the W-4 form already on file. When in doubt, ask employees to complete fresh W-4s before the end of the year.
Hospital credit card use
Special rules apply for credit card use by cash-based taxpayers. Practice purchases made at year-end via credit card may be eligible for deduction even though the credit card is not paid until January or February of the subsequent year. For accrual based taxpayers, credit card charges almost always represent amounts that can be deducted in the year the charge occurred. Assure that your accountant has copies of all credit card statements that span the end of the year so that a correct accounting and obtaining maximum deductions for the practice can occur.
Some items to consider for purchase via credit card before the end of the year are:
* Practice printing expense needs - stock up on necessary office supplies such as exam room report cards, stationery, envelopes, business cards, hospital brochures and similar specialized paper products.
* Check out staff uniform condition. If they are tattered and worse for wear, consider ordering new uniforms for arrival before the end of the year. Use of the hospital credit card for this kind of purchase can represent a deduction for the year.
* Computer supplies or janitorial supplies represent other expenditures that can be made by credit card.
Because drugs and medical supplies used in the course of patient therapy are precluded from deduction until the point that supplies are sold to clients, charging large volumes of drugs and medical supplies to credit cards may not be a good plan.
In general, vehicles that have a substantial personal use are most easily accounted for when they are titled to the individual practitioners rather than through the hospital. Most all practices incur some vehicle use that is used for bona fide business purposes, such as trips to pick-up supplies or for continuing education.
Before year-end, make sure that mileage logs (hopefully contemporaneously maintained) are up-to-date. Tally mileage and assure that all vehicle owners are reimbursed for mileage by year-end.
The standard per mile amount is 36.5 cents for 2002. For the 2003 year, the business mileage amount decreases to 36 cents.
Keep in mind that when vehicles are titled to the practice, special rules exist. Your accountant will need specific mileage use of the vehicles so that the appropriate personal use of that vehicle can be included in the applicable employee's payroll by year-end. The rules pertaining to business-owned vehicles portion of personal use are extensive and complex. Please talk to your accountant to ensure they are handled correctly so you can optimize deduction.
Insurance rates have become much higher within the last few years in almost all areas of risk management. Check policies to assure coverage is adequate.
Review practice general insurance for replacement cost coverage.
Are inventory values high enough? Is the estimate of fair replacement value of medical equipment appropriate? Is employee theft and bonding insurance provided?
If your practice has a retirement fund, is the appropriate level of insurance in force in accord with the bonding requirements?
You might also want to consider a review of your homeowner's policy at the same time. Our personal finding is that these policies often go on for a series of years and are not adequately updated to reflect the true nature of assets owned by the practitioner. Insurance coverage may be inadequate or the detail may be incorrect so that claims, in the event of difficulty, might be contested by the insurance company.
For Subchapter S corporations, shareholders must assure that any health and disability premiums paid by the practice are grossed up and included in payroll to maximize the deduction available to those shareholders.
Again, this is an important issue to discuss with your accountant. Ideally, such premium gross-up issues should be considered before the last payroll of the year is cut so that the inclusion can be made in a timely fashion, before preparation of the final W-2 forms.
If any life insurance policies exist, review these with the accountant. Many practices have older life insurance policies based on what is called a split-dollar arrangement. The IRS has recently provided much guidance regarding resolution of these policies, which in the past have been viewed as possibly abusive situations. If you have any split dollar life policies paid for by your business, then you should be discussing these and plan how to handle them in the future with your accountant.
Profit sharing and pension plans
Easy to get into and challenging to administer, and get out of, all plans are fraught with various perils that are unique to each type. The scope of this article precludes discussing each plan type. At the least, you should talk with your CPA about whether your plan documents are current and in accord with the most current laws passed by Congress. Be aware that many retirement plans fall under two areas of law: regulation by the IRS as well as the Department of Labor. The combination of both lead to fiduciary burdens of which many practice owners are unaware.
Most practice owners have fairly significant and complex tax lives. Many times, business profits flow through to individual owner tax returns. In the last several years, we have seen veterinarians continue to perform very well in their individual practice situations, despite doom and gloom in the general press about the American economy. Practitioners are often faced with unpleasant surprises at the time tax returns are due.
Your accountant can only help you if you provide enough information on a preliminary basis to make some educated guesses about what your specific situation will be. Most accountants will provide tax planning at year-end if you are concerned about potential tax liability at April 15.
If your practice has performed especially well in this last year, and you have been able to proactively retire debt, you may need to examine a bit more carefully your individual tax circumstance to assure that quarterly tax estimate payments have kept up with the reality of your success. Don't be caught unaware.
Last in this to-do list is the practice's fee schedule. Adequate assessment of fees to your clients assures that you will have the necessary capital to invest into the practice for new equipment, expansion, and to maintain an adequate standard of care. This standard of care is based on retaining a competent and well-trained staff.
Employee benefit programs, particularly those based in healthcare coverage, continue to escalate at rates far greater than most veterinary practice fee schedules. Employees demand a living wage in order to keep them enthused about their jobs. The only way you can maintain the compensation needs of your staff is through adequate attention to the fee schedule.
Don't procrastinate about increasing fees at the turn of the year. Make sure adequate increases are in place so the practice can continue to move ahead. If additional taxes are in store for you in April, the fact that you have been attentive to the fee schedule early in 2003 should help cushion the blow by providing a bit of extra cash in the bank account in preparation.
Use this article as a starting point to discuss issues with your accountant. Next, your attorney is required to assure legal documents are up-to-date and reflect the arm's-length nature of transactions with related parties and that other aspects of practice legal documentation are up to snuff.
Don't look at these issues as another compliance burden, but, look at them as an opportunity to maximize the return of your investment in the veterinary profession.