Tax reform is likely to have significant consequences for veterinarians. Not only does the reform bill contain several provisions impacting individual rates of income tax, but it also contains provisions that affect how veterinarians manage their accounts and expenses. Let’s take a look at the details of tax reform and discuss how each provision is likely to affect veterinary businesses.
New Pass-through Tax Provisions
The new tax reform allows certain pass-through businesses to deduct up to 20 percent of their qualifying business income. However, some “specialized service” businesses, including veterinarians, cannot use this benefit unless their taxable income is under a defined threshold. The new individual threshold is $157,500 and the threshold for joint filers is $315,000.
The aim of the new pass-through provisions is to prevent high earners from converting their salaries to income that is eligible for the deduction. However, critics have complained that the rules surrounding pass-through tax deductions are unclear. Doctors, veterinarians, lawyers and people working in the financial industry are all excluded from claiming pass-through tax deductions, whereas high earners working in professions such as architecture are not.
Fair or not, the new rules surrounding pass-throughs prevent veterinarians from claiming a 20 percent deduction on their business income, unless their income is less than $157,000 per year. Veterinarians must be aware of this rule, as it can make a significant difference to the amount of tax they need to pay.
New Cash Accounting Provisions
The tax reform allows veterinarians to use the cash method of accounting as long as their annual gross receipts do not exceed $25 million for the three years immediately before the current tax year. This limit of $25 million represents an increase compared to the previous threshold.
New Expenses Provisions
Veterinarians can now deduct new and used equipment as expenses for five years. The tax reform increases the total permitted amount of expenses to $1 million. Veterinarians can now also claim deductions for improvements to non-residential properties, including maintaining the roof or adding heating, ventilation, air conditioning, security, fire protection and alarm systems. However, from 2022, the 100 percent allowance will decrease by 20 percent per year.
New Individual Tax Provisions
As well as understanding the new tax provisions that will affect their businesses, veterinarians also need to become familiar with provisions that will affect them as individuals. The seven income tax brackets have all been modified as follows:
- Income under $9,525 ($19,050 for joint returns): tax rate of 10 percent
- Income between $9,525 and $38,700 ($19,050 and $77,400 for joint returns): tax rate of 12 percent
- Income between $38,700 and $82,500 ($77,400 and $165,000 for joint returns): tax rate of 22 percent
- Income between $82,500 and $157,500 ($165,000 and $315,000 for joint returns): tax rate of 24 percent
- Income between $157,500 and $200,000 ($315,000 and $400,000 for joint returns): tax rate of 32 percent
- Income between $200,000 and $500,000 ($400,000 and $600,000 for joint returns): tax rate of 35 percent
- Income over $500,000 ($600,000 for joint returns): tax rate of 37 percent
As the top individual income tax rate has decreased from 39.6 percent to just 37 percent, owners of the largest veterinary businesses will pay less tax as a result of the reform.
The tax reform makes some important changes to tax for veterinarians, most notably by excluding them from using the pass-through benefit. By familiarizing themselves with these changes, veterinary business owners can plan their budgets to ensure the financial health of their businesses.
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