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The Tax Cuts and Jobs Act that was passed in 2017, created several sweeping changes to tax law, one of which was the implementation of the Section 199A Deduction. IRC Section 199A allows individuals with pass-through business income to deduct up to 20% of their qualified business income (QBI) from their taxable ordinary income on their individual tax return.

Although, the additional deduction is a welcomed tax break for business owners, Veterinarians (among several other professional services) fall into a sub provision in the tax code and are considered a Specified Service Trade or Business which reduces the maximum QBI deduction an owner of an SSTB business can take based on the owner’s taxable income each year. In 2023 taxpayers will begin to see this 20% deduction reduced when their taxable income exceeds ($364,200 for joint filers/$182,100 for all other filers) and is completely phased out when the  taxpayer’s taxable income exceeds ($464,200 for joints filers/$232,100 for all other filers). This is where comprehensive year-end tax planning comes into play.

In previous posts, we have discussed year end equipment purchases, and cost segregation studies and the tax benefits these strategies provide. While both strategies are excellent ways to lower your taxable income in the year implemented and could reduce a taxpayer’s taxable income below the lower income threshold ($364,200/$182,100) allowing for the 20% QBI deduction to realized in full, a practice does not always have the ability to take advantage of these strategies each year. The question becomes, what can a practice do then to lower their taxable income to maintain some if not all the QBI deduction?

This can be accomplished by accelerating deductions into the current year that were originally planned to be paid after year end. Some examples of deductions that can be paid before year end are: Employees bonuses, Rent, Drugs and Supplies (you can order January/February planned purchases and pay for these before year end), Insurance premiums, and Utilities, to name a few. If you are on the cusp of eligibility of the 20% QBI deduction, accelerating deductions such as the ones indicated above, can lower your taxable income to take advantage of some or all the QBI deduction in the current year, providing significant tax savings on your federal income tax return.