Dental CPAs: The Top Ten Mistakes Dentists Make Filing Their Taxes

Original Article found at http://dentalcpas.blogspot.com/2012/11/the-top-ten-mistakes-dentists-make.html

Lance Jacob of the Dental CPAs has compiled a list of the top ten most common tax filing mistakes that he sees his dental clients making. If you don't have a dental CPA, contact Lance.

1. Filling out tax forms with an incorrect Social Security number. The IRS computers will automatically reject your deductions and credits if your Social Security number is wrong.[i] This mistake seems careless and trivial, but it is paramount to have the right Social Security number when filing your taxes. Your social security number is your tax ID number, which is linked to numerous transactions such as income statements, savings account interest, and retirement plan contributions. It is also vital to claiming tax credits.

2. Double dipping on dependents for divorced taxpayers. Ill repercussions could result such as additional taxes, penalties, and interest charged.[ii] A child can ultimately meet the rules to be a qualifying child of only one person.[iii] Once divorced, your children do not duplicate out of thin air; therefore they cannot be claimed twice in taxes. The IRS does not allow both divorced taxpayers to claim a child as a dependent.

3. Not reporting non-deductible IRA contributions. Any contribution to an IRA, whether it is deductible or non-deductible, should be reported on Form 8606, so when you withdraw it you are not taxed on it. Plain and simple, all contributions to an IRA must be reported.

4. Incorrectly reported estimated tax payments. If your accountant instructed you to make quarterly estimated tax payments, be sure to let him or her know the details of the payment for each installment. Provide the check numbers, dates of payment, and the amount of each payment. What often happens is people claim they made the payments as their accountant told them, but did not keep any records and inadvertently forgot a payment or two. If the accountant includes all of the estimated payments on the return when they all were not really made, the IRS or state government will send a notice of tax due with penalties and interest.

5. Incorrect Federal ID number used on 1099 MISC. Although your accountant can easily fix this, the less the IRS has to contact you, the better it is. The IRS matches 1099MISC and the Social Security number or Federal Identification number used. If you provide services, and the client you did the work for issues a 1099MISC, be sure they know to use the federal identification number of your business and not your social security number. If they use the wrong number the IRS will send you a notice that you did not report income on your personal return, when in fact it was reported correctly on your business return.

6. Exceeding the mortgage interest deduction limit on Mortgage and home equity debt in excess of $1.1 million. This error commonly falls as the fault of both the taxpayer and accountant. They only deduct the amount reported of the mortgage interest statement, Form 1098, and do not bother to check the amount of mortgage the taxpayer has. The tax laws limit the amount of deductible interest to the interest on the first $1,000,000 of home mortgage debt and $100,000 of home equity debt[iv]. So if you have a mortgage of $2 million, you can only deduct mortgage interest related to the first $1.1 million in total debt.

7. Standard mileage vs. actual expenses. Mistakes in this area come from inconsistent use of methods. If your car is for business purposes only, then the entire cost of its operation can be deducted. However, if the car is used for both business and personal use, only the cost of its business use can be deducted. The amount of your deductible car expense can be found using either the standard mileage rate method or the actual expense method. [v] Some people will qualify for both methods but you must choose only one method when you start using the vehicle and continue with that method until you replace the vehicle. Be sure to figure your deduction with both methods initially to see which gives you the larger of the deductions.

8. First-Time Homebuyer Credit recipients unaware of the fine print. Those who received a First-Time Homebuyers’ Credit towards their purchase of a home settled on prior to 12/31/08 must begin repaying that money on 2010 tax returns. Now is the time to take a good hard look at the details of this credit. Many who accepted the $7,500 credit may not realize that it was in fact a loan, and the government will begin not-so-politely asking for the money back over the course of the next 15 years starting with 2010 individual tax returns. As with any federal money however, there is a lot of fine print to read into on this one.[vi]

9. Forgetting to tell your tax preparer you took an early distribution on an IRA; therefore, failing to calculate the early distribution penalty of 10%. If you are under the age of 59.5, a distribution on an IRA (including employer matching and profit sharing) is considered early, and subject to a 10% additional tax. This tax is in addition of other taxes that apply to the distribution.[vii]

10. Forgetting your signature on your return! If you were an artist, you wouldn’t forget to sign your masterpiece upon its completion, would you? You must sign your taxes for the IRS to process your taxes. Filing your taxes electronically is a foolproof way to ensure your taxes will not go unsigned. These software packages do not allow documents to be sent unless every step is completed.
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[i] http://www.walletpop.com/taxes/most-common-taxpayer-mistakes/
[ii] http://taxes.about.com/od/dependents/a/Dependents.htm
[iii] http://www.irs.gov/individuals/article/0,,id=218767,00.html
[iv] http://www.irs.gov/publications/p936/ar02.html
[v] http://www.irs.gov/taxtopics/tc510.html
[vi]http://money.cnn.com/2009/09/24/pf/expert/home_buyer_credit.moneymag/index.htm
[vii] http://www.irs.gov/faqs/faq/0,,id=199762,00.html

You can contact Lance Jacob with additional questions or comments at ljacob@dentalcpas.com or (800) 772-1065.www.dentalcpas.com

From Dental CPAs: Dental Associate has Practice Purchase Questions

Thanks to our friends over at Dental CPAs we bring you this great thread from Dentaltown regarding Associate transitions.

Check them out at www.dentalcpas.com and http://dentalcpas.blogspot.com

I'm going to begin a 1-2 year associateship with the opportunity to buy 50% of the practice after that period.  I've hired a practice sales broker/CPA to provide me with a second opinion on the appraised value of the practice.  

Jason Wood, Dental Attorney:

Is he representing you as a CPA or as a broker?  There is a big difference in fees I would imagine.   

I'm trying to arrange it so everything about the associateship, transition, and purchase of the practice will be arranged in a contract prior to beginning.  

Jason Wood, Dental Attorney:

This is extremely expensive to do.  My recommendation would not be to do this but to have everything addressed in the associate agreement with the particulars of the deal (ie purchase price, ability to acquire 50% of the building, etc.) being built into the contract.  Otherwise to properly do this now will cost you around $15,000.  Wait until you know you can work together before spending this kind of money.  

However, I'd like to receive an appraisal of the building/real estate, but the CPA has informed me that it can become very expensive to have the building appraised.  Although the CPA does not appraise office buildings himself he has recommended an agent he has used in the past.  He has also told me that the building appraisal could cost several thousands of dollars and may not even matter since any bank/lender will want another appraisal to loan me the money.  

Jason Wood, Dental Attorney:

Agree that you can buy in to the building at the appraised value of the building when you acquire the practice, that way you push the appraisal out and the bank that will lend you to money for the acquisition would be happy to lend you more on the real estate since it strengthens their position.

Is there any benefit to having the building appraised this early into the associateship?  With the real estate market as bad as it is I would like to capitalize on the depressed market values. 

Tim Lott, Dental CPA

You should keep in mind having it appraised now won't guarantee you that this value will be the price in the future. Put yourself in the seller’s shoes. Historically, after real estate has declined substantially, would you be willing to lock in a price on an asset that's likely to go up in the future?

What you can do is consult with a commercial real estate agent and see what the comps are for similar space so you can get a range of what to expect in terms of real estate value. See if that range matches what the seller is thinking. I don't see any benefit in paying for the appraisal now.

With respect to the practice, I do see the benefit in trying to establish the price now; however, just know that you can appraise the practice as of say 12/31/2011 in 2013 very easily.

Good luck.

Jason Wood, Dental Attorney:

Sure.  Creating the partnership agreement, the purchase agreement, the lease review, etc. would be very expensive to do right now.  You can:

1.  Agree to the purchase price now
2.  Agree to the closing date
3.  Agree to when the parties need to back out before it becomes binding
4.  Agree on stop gap measures to insure compliance after the back out date
5.  Agree on the structure of the partnership
6.  Agree on the building acquisition

All in the associate agreement without having to draft all of the other documents right now.  That way if the deal doesn't go forward, you don't spend the extra money on the details contained in all of those other documents.

Went ahead and attained an appraisal. I'm meeting with the sales broker/CPA to discuss the appraisal. What are some questions to ask him?

Tim Lott, Dental CPA 

It seems to me your questions will be driven by how that meeting goes and the information that gets presented. I don't know what questions I'm going to ask of a seller\broker re: their valuation or asking price until I've seen what they've done, how they did it, the information they used generate their report.

Once you see this you'll be in a better position to know what questions to ask I would think.

Good luck!

This first appeared on Dentaltown.