Many medical and dental practices use multiple entities for a variety of reasons. A recent Tax Court case emphasized the importance of proper documentation and careful planning to achieve good tax results. In the recent case, a dentist created a separate business entity to manage operations. The Tax Court refused to allow him to deduct his management fees because of poor documentation.
If you are using a separate business entity for any reason, adopt the following practices:
- Keep separate and complete records for each entity. Respect the separate existence of each entity.
- Document transactions between the entities, especially payments. Formalize leases and management agreements in writing. Keep entity minutes up to date.
- Be aware of the passive activity rules and consider income types when planning multiple entities.
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