Maximizing Tax Deductions for Optometry Practice Owners: Understanding Tax Brackets, Deductions, and Credits

As an optometry practice owner, you have a unique set of financial considerations that require careful planning and strategic decision-making. 

One crucial aspect of managing your practice’s finances is understanding the intricacies of tax brackets, deductions, and credits. 

By using these tools effectively, you can minimize your tax liability and maximize your practice’s profitability. 

In this blog post, I’ll break down the seven tax brackets and explain how they apply to optometry practice owners. I’ll also give you some action steps you can take to optimize your tax strategy. 

The 7 Tax Brackets in our Progressive Tax System

Tax brackets determine the percentage of your income that you owe in taxes. As a practice owner, your income may vary from year to year, making it essential to understand how tax brackets work. 

The U.S. tax system operates on a progressive tax structure, meaning that higher income levels are subject to higher tax rates. 

To better understand the progressive tax system, imagine a pyramid of champagne glasses. 

Similar to how champagne is poured from the top glass and spills down to the subsequent layers, income is taxed progressively in different brackets. 

The top glass represents the lowest tax bracket, and as we move down the pyramid, the tax rate increases.

So, imagine we’re pouring champagne into the glass at the top of the pyramid. 

It fills up that first glass, which is a 10% tax bucket. The next layer of glasses down is a 12% bucket. The next layer down is a 22% layer or bucket, then 24%, then 32%, then 35% and 37%. 

In other words, as your income increases, you move into higher tax brackets and pay a higher percentage of your income in taxes.

So how do the tax brackets work for optometry practice owners? 

As an optometry practice owner, your income will be subject to federal income tax based on the tax brackets mentioned above. 

However, it’s important to note that your practice’s income is considered separate from your personal income. 

Most optometry practices are structured as pass-through entities, such as sole proprietorships, partnerships, or S corporations. This means that the income generated by the practice “passes through” to the owner’s personal tax return.

So, let’s say you’re a practice owner with a taxable income of $150,000. By understanding the tax brackets, you can strategically plan your expenses and deductions to ensure you stay within the 24% tax bracket, rather than moving into the higher 32% bracket.

Key Takeaway: Familiarize yourself with this year’s tax brackets and plan your practice’s finances accordingly to optimize your tax strategy.

Leveraging Deductions

As an optometry practice owner, you have several deductions available to you that can significantly impact your tax liability. Here are some common deductions to consider:

1. Business Expenses: Deductible expenses related to your practice, such as rent, utilities, equipment, supplies, and employee salaries, can help lower your taxable income.
   
2. Home Office Deduction: If you have a dedicated space in your home for administrative tasks related to your practice, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of your home expenses, such as mortgage interest, property taxes, and utilities.
   
3. Professional Development: Expenses incurred for continuing education, conferences, and professional memberships can be deducted, as they contribute to your growth as an optometrist and practice owner.
4. Retirement Contributions: Contributions to retirement plans, such as a Simplified Employee Pension (SEP) IRA or a Solo 401(k), are tax-deductible and can help you save for the future while reducing your current tax liability.
5. Plan for estimated taxes: As a practice owner, you may need to make quarterly estimated tax payments to avoid penalties. Work with a tax professional to determine the appropriate amount to pay each quarter.
   

Key Takeaway: Keep meticulous records of your business expenses and consult with a tax professional to ensure you are maximizing your deductions within the bounds of the law.

Exploring Tax Credits

Unlike deductions that reduce your taxable income, tax credits directly reduce your tax liability on a dollar-for-dollar basis. As an optometry practice owner, there are several tax credits you may be eligible for:

1. Small Business Health Care Tax Credit: If you provide health insurance to your employees, you may qualify for this credit, which can offset a portion of your premium costs. It can cover up to 50% of your premium costs, making it a significant financial advantage.
2. Work Opportunity Tax Credit: Hiring individuals from specific target groups, such as veterans or individuals receiving government assistance, can make you eligible for this credit. It can provide a substantial reduction in your tax liability.
3. Research and Development (R&D) Tax Credit: If your practice invests in research and development activities, you may be eligible for this credit, which encourages innovation and growth. Two things to note here though: 1) The vast majority of practice owners will struggle to pass the 4-part test of the R&D structure and thus NOT qualify for the credit, and 2) Using this tax credit can increase your risk of an audit. Check out this podcast for more info on this. 
4. Energy-Efficient Equipment Credit: Investing in energy-efficient equipment for your practice can not only save you money on utility bills but also make you eligible for a tax credit. This credit encourages environmentally friendly practices while reducing your tax burden.

Key Takeaway: Explore the various tax credits available to optometry practice owners and consult with a tax professional to determine your eligibility and maximize your savings.

Closing Statement

Understanding tax brackets, deductions, and credits is essential for optometry practice owners who want to optimize their tax strategy and maximize profitability. 

By leveraging these tools effectively, you can reduce your tax liability, freeing up resources to reinvest in your practice’s growth and success. 

If you want personalized assistance in implementing the strategies discussed in this article, book a Triage call with our team of financial planning experts. 

We specialize in helping optometry practice owners reduce their tax bills, proactively manage cash flow, and make prudent investments. 

You can click on the “Triage Conversation” link at the top right of this page to schedule your call.