Year-End Tax Hack for Micro-Business Owners: Prepay and Prosper

As a physician who owns a micro-business, tax planning should be a year-round activity. One of the most straightforward yet impactful strategies to reduce your taxable income for the current year is to prepay next year’s expenses before December 31. By doing so, you can accelerate deductions, lower your taxable income, and increase your cash flow for the coming year.

This approach is especially advantageous for doctors who operate as sole proprietors, PC’s, PLLCs, or S-corporations that follow a cash-based accounting method. Under cash-based accounting, expenses are deductible in the year they are paid, even if the associated services or goods will not be delivered until the following year.

Let’s break this strategy down step by step, review its reasoning, and explore examples of how it can work for micro-business owners like you.

Why Prepaying Expenses Makes Sense

1. Immediate Tax Savings Prepaying next year’s expenses in December lowers your taxable income for the current year, which can directly reduce the amount of taxes owed to the IRS. This means you can reap the benefits of your investment in your business sooner rather than later.

2. Leverage of Cash-Based Accounting Most small businesses, including many physician micro-businesses, operate on a cash-based accounting system. In this system, you record income when you receive it and expenses when you pay them. Prepaying expenses allows you to shift deductions into the current year while pushing income recognition into the next year, effectively creating a favorable tax deferral.

3. Maximizing Year-End Revenue Gains The final quarter of the year is often the busiest for many physician practices, thanks to increased patient visits and insurance utilization before deductibles reset. Prepaying expenses during this period offsets these revenue gains, minimizing your taxable income spike.

4. Capitalizing on Discounts Some vendors and service providers offer discounts for paying in advance, adding another layer of financial benefit to this strategy.

What Types of Expenses Can Be Prepaid?

Here are some examples of common expenses micro-business owners might consider prepaying:

• Professional Services: Pay for coaching, consulting, or legal/accounting fees in December for services rendered next year.

• Equipment Purchases: Buy medical equipment, computers, or office supplies that will be used in the coming year.

• Continuing Education: Register and pay for next year’s CME courses, conferences, or certifications. For example, this month I purchased my plane tickets for my speaking engagement for CME Away in Ireland and Iceland next year. This will place the expense in my 2024 ledger.

• Software Licenses or Subscriptions: Renew annual software licenses, EMR subscriptions, or marketing tools.

• Maintenance Costs: Pay for office maintenance, like HVAC servicing or landscaping.

• Advertising: Prepay for advertising campaigns scheduled for the next year, such as digital ads or community sponsorships.

Example 1: Dr. Patel’s High-Performance Coaching

Dr. Patel, a self-employed pediatrician, has been struggling with burnout but is committed to turning her micro-business around. In November, she learned about the benefits of working with a high-performance coach to improve her mindset and create efficiencies in her practice.

Instead of waiting until January to sign up for coaching, Dr. Patel decided to prepay for three months of coaching in December. Although the coaching sessions will occur in January, February, and March, her $7,500 payment is deductible on her current year’s taxes.

The Result:

• Dr. Patel reduced her taxable income for the year, saving approximately $2,500 in taxes (assuming a 33% effective tax rate).

• She entered the new year with a clear plan to enhance her business and personal performance without increasing her January cash outflows.

Example 2: Dr. Ruiz’s Equipment Upgrade

Dr. Ruiz, an independent family medicine physician, planned to invest in a new ultrasound machine to expand his diagnostic capabilities. He initially intended to purchase the equipment in January, but after consulting with his CPA, he realized that buying it in December could reduce his current year’s tax liability.

Dr. Ruiz purchased the $20,000 ultrasound machine on December 15. By doing so, he deducted the expense under Section 179, which allows small businesses to expense certain equipment costs immediately instead of depreciating them over time.

The Result:

• Dr. Ruiz reduced his taxable income for the year by $20,000, saving $6,600 in taxes (assuming a 33% effective tax rate).

• He started January with the new ultrasound machine already in place, allowing him to generate additional revenue earlier in the year.

Practical Tips for Prepaying Expenses

1. Work with a CPA Collaborate with a knowledgeable CPA who understands physician micro-businesses. They can help you identify which expenses qualify for early payment and ensure compliance with IRS rules.

2. Plan for Cash Flow While prepaying expenses reduces taxes, it does require upfront cash. Ensure your business has sufficient liquidity to handle the payments without jeopardizing your operations.

3. Document Everything Maintain clear records of prepaid expenses, including invoices and proof of payment. This documentation is essential in case of an audit.

4. Understand the Limits Not all expenses can be prepaid, and the IRS has specific rules about what qualifies. For instance, prepayment for goods or services beyond 12 months may not be fully deductible.

5. Time Purchases Strategically If you’re considering major equipment or service investments, timing them at the end of the year can provide immediate tax benefits while preparing your business for a strong start to the new year.

Potential Pitfalls

While prepaying expenses can be highly beneficial, there are a few considerations to keep in mind:

• Overextension: Don’t overextend your cash reserves to reduce taxes. Maintaining a healthy cash flow is critical for business sustainability.

• Audit Risks: Excessive prepayments or attempts to manipulate income and expenses may trigger IRS scrutiny. Always consult your CPA for guidance.

• Opportunity Costs: Evaluate whether prepaying makes sense compared to other investment opportunities, such as paying down high-interest debt or funding a retirement account.

Conclusion: Accelerate Tax Deductions While Investing in Growth

Prepaying next year’s expenses at the end of this year is a powerful tool for micro-business owners, offering immediate tax savings and setting the stage for future success. Whether it’s professional coaching, medical equipment, or educational conferences, this strategy allows you to invest in your business while keeping more money in your pocket.

As you approach the end of the year, take time to review your financials, consult your CPA, and make strategic decisions that will benefit both your business and your bottom line.

Call to Action

At SimpliMD, we specialize in helping physicians like you thrive as micro-business owners. If you’re ready to take control of your finances and grow your business, join our SimpliMD membership today for just $99. Plus, don’t forget to check out our course, Creating a Practice Without Walls, for practical guidance on building your dream career.

Make this the year you take control of your practice and your financial future. Prepay smarter, work smarter, and thrive in the marketplace.