Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

ORDINARY + NECESSARY = DEDUCTIBLE

by Andrew D. Schwartz, CPA

Just about everyone has friends, family members, or colleagues at work who are very aggressive with the tax deductions they claim.  Every year, at about this time, they start telling you about all of the crazy things they deducted last year.  And then they usually try to convince you that what they deducted must be okay, since the IRS never disallowed any of their deductions from last year.

The fact that the IRS didn't question their deductions shouldn't be interpreted to mean that what they claimed is allowable.  It simply means that the IRS didn't select this person's tax return for audit.  Remember, everything is deductible until you get audited.   

So what do the rules really say about deducting your professional expenses?  To be allowable, an expense must be both "ordinary" and "necessary" in connection with your profession.  For example, purchasing a Palm Pilot to use for work qualifies as ordinary and necessary, and therefore, is deductible.  Purchasing a leather carrying case from Gucci, however, probably doesn't qualify.  Even though you may view your Gucci carrying case as necessary, it most likely doesn't meet the ordinary test.

Let's take a look at some of the professional expenses commonly incurred by health care professionals:

Automobile expenses:  Driving between job sites is deductible.  So is driving between your home and a temporary job site, job interviews, and conferences.  Commuting between your home and a regular place of business generally isn't tax deductible.

There are two ways for you to calculate your automobile expenses.  You can either claim $.36 per business mile driven in 2003 (increased to $.375 for 2004), or base your deduction on the percentage of miles your car was driven for business multiplied by the actual costs incurred during the year.  Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.

Computer equipment:  There are two tests you must meet to deduct computer equipment.  Purchasing the computer must be a requirement of your employment as well as for the convenience of your employer.  If you buy a computer so you can work at home instead of staying late at the hospital or lab, you're out of luck.  Many people find that it's easier to deduct their computer purchases in years they have independent contractor income.

Education, Licenses & Examinations:  Any time something qualifies you for a new trade or business, the cost incurred isn't deductible.  That's why you can't write off your medical school tuition.  Costs incurred in connection with improving your skills in your current profession are generally deductible.  Some of the larger deductions are claimed by people working towards an MPH or a dental specialty.  

Home Office Deduction:  Prior to 1999, you had to perform your income producing activity within your home office to be able to claim this deduction - which for doctors meant that they had to see patients in their home to qualify.  Starting in 1999, it became much easier to claim a home office.  As long as you perform administrative and managerial tasks on a regular basis within a portion of your home used exclusively for business, you're eligible for the home office deduction. For renters, this is a great opportunity, since rent isn't otherwise deductible on your federal tax return.

Insurance:  Malpractice insurance and insurance on your business assets are deductible.  Life and disability insurance aren't deductible.

Temporary Job Assignment:  A huge tax deduction awaits you if you take a job for a period of less than year, with the intent of returning to the city where you were working prior to taking that job.  Believe it or not, you can deduct all of your travel, lodging, and half of your food.  Basically, it's as if you're on an extended business trip for up to a year in length.  

How you deduct your professional expenses depends on how you were compensated during the year.  If taxes were withheld from your pay, then you are considered an employee, and will claim these expenses as a miscellaneous itemized deduction.  Those of you who are independent contractors can deduct your professional expenses directly against your private practice or moonlighting income on a Schedule C.

For more information about deducting professional expenses common to health care professionals, or to download our Excel Spreadsheet to help you keep track of your expenses, check out www.mdtaxes.com.

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CHECKLIST TO BRING YOUR GREAT IDEA TO THE PUBLIC MARKETS

by John Brzezinski, Venture Capitalist

Get a great idea.

• Is your idea great?

• Many ideas come from advancements made by people who really understand an industry, or practices borrowed from other industries.

• Has someone else already thought of that great idea?  Is it patentable?

• Check out Industry forums, collaboration opportunities.

Find out if there’s a market for the idea.

• What will ultimate product look like, and who will buy it?

• What’s the market?  What pain is felt by the market?

• Is it a new market, or is it replacing something else?

• What are the requirements (price, packaging, timing) to take advantage of this market?

• Google, trusted advisors, and your colleagues make good sources to find answers to these questions.

The “Real-Win-Worth” discussion  (is it “real,” can I “win,” is it worth it)

• If there’s a market, can I win?

• Can I do this?  Starting a company is a full time endeavor, lots of hours, frustration, ups and downs but unbelievably rewarding.

• Maybe licensing the technology to an established business makes more sense.

Develop your business plan.

• Your business plan is a living document, and a GREAT exercise to go through.  Developing your plan forces you to think through all aspects of your business.

• Your plan should be a minimum of 25 pages, and the end result should be a solid executive summary (ticket to “show”).

• Make sure to include market analysis, competitive position, operating plan, unfair competitive advantage, management team, product strategy, and other relevant information.

Assemble the appropriate team, including service providers.

• Key management hires generally include a development person and an engineering manager.  Sales and business people often come later

• Who will be on your Board of Directors?  And who will be your advisors?  If you have a great idea, it's not unusual to compensation your team in equity at this point.

• Attorneys usually will be your first services hire.  Interview carefully, and make sure they have industry experience and plenty of resources.

Set up company.

• Here rely on the advice of an experienced attorney and accountant

• Choose your type of entity between a C-Corp, S-Corp or an LLC

• Setting up an entity will help protect you from potential liabilities that might arise as you develop your idea.

Get it funded!

• MANY options

• Bootstrapping to “proof of concept” is often the first option,  which reflects well with investors.  (Bootstrapping is when you reinvest the cash flows from the business back into the business to fund it's growth.)

• Hit up your friends and families.  Then look for angel investors or to the venture capital community.  Don't forget about government grants (SBIC, NIST etc.)

Execute on development plan

• Engineering/product development

• FDA?

• Stay lean.  Now might be the time to rely on good consultants, especially with medical technologies.

• Strong plan for alpha, beta development etc.

• Milestones, additional financing rounds

Ramp up sales and marketing and go-to market!

• Now's the time to bring in an experienced CEO

• Once you have commercial product, you need to figure out the product mix and how the produce will be distributed.

GO PUBLIC! Or selling your business to a larger company is also nice.

• IPO market may not be an option.  You will need sales, profits most likely, and be able to demonstrate growth potential.

• There are lots of advantages to staying private as long as can.

• Most “exits” end up being through acquisitions.  Take a look at the medical devices industry.

• Sometimes, you can run the business as lifestyle company, and never go through the venture process.

John Brzezinski is in the venture capital field in the Boston area.  To contact John, please e-mail us at admin@cpaniche.com, and we'll gladly forward your information to him.

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