Tips from Medical Practice Bookkeeping Expert: Shawna Aho, STAC Bizness Solutions.
I’m going to get right to the point in this post… Personal expenses are different from business expenses so please do not run personal items through your medical or dental practice.
The IRS offers the following explanation of a business deduction, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
If a deduction falls into one of these three categories it is likely to be allowed:
- The expense helps you get patients, involves office space, furniture, decor, computers, training, and other infrastructure.
- It is directly related to the process of earning revenue such as supplies, employee costs, patient management systems, and other expenses used when services or products are purchased.
- Involves administrative costs such as accounting, banking, record keeping, payroll costs and other activities that occur after revenue is earned.
By contrast, personal expenses have no direct relation to running a medical or dental practice, and you cannot deduct personal, living, or family expenses on your tax return. From a medical practice bookkeeping standpoint, mingling personal expenses with business expenses creates a big problem with maintaining accurate bookkeeping. Without accurate financials, medical practice owners run the risk of underreporting revenue or overstating expenses.
Personal charges in your practice will be highlighted during an IRS audit and may put you at risk for tax penalties if you can’t confirm their business purpose. Below is one tax court case where an individual tried to deduct personal expenses as business deductions, and they lost:
Scott v. Commissioner
A flight attendant was denied the right to deduct hair and nail costs with the tax court noting, “Grooming expenses (i.e., hair and nail maintenance) are inherently personal expenses, and amounts expended for grooming are not deductible regardless of whether an employer requires an employee to be well groomed.” She was also denied a deduction for her personal cell phone and clothing that she wore only for work purposes because it was every-day clothing.
The IRS Tax Code is available online. Though these are subject to change and your individual situation could be interpreted differently, these publications give a sense of what is and is not considered deductible by the IRS today.
- Publication 334: Tax Guide for Small Business
- Publication 463: Travel, Gift, and Car Expenses
- Publication 535, Business Expenses
As you can see, a fundamental rule of business is to keep your business expenses separate from your personal expenses. Always seek to keep your medical and dental practice bookkeeping legitimate and avoid charging those personal expenses to the company credit or debit card. Not only will your financial reporting be more accurate, but it also helps you avoid potential headaches down the road!
If you’re ready to turn your practice’s bookkeeping over to a professional who will ensure things are handled the right way, don’t hesitate to call us at 844-424-9637 or complete the form below.
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