Four Common Tax Mistakes in Pharmacies
Are your independent pharmacy’s taxes correct? You may be paying more than you should. Watch the video below, covering common mistakes made in the Form 199A, accrual to cash accounting issues, writing off inventory and not deducting items such as insurance expenses.
Scotty Sykes, CPA, CFP® has experience with independent pharmacy accounting, helping small businesses around the country manage their tax impact and foster pharmacy growth.
Refer to our video on the 2021 Employee Retention Tax Credit for additional tax information on how you could save your pharmacy a lot of money.
If you prefer to read this content, the video transcript is below.
There are some common tax mistakes we typically see. When we do an RX Assessment service, we overview the books and records for a pharmacy, we check over their tax returns, and we typically see several instances of some tax errors.
And number one would be Section 199A, the qualified business income deduction. So we see that missed quite often there in pharmacies, believe it or not, and that can be up to 20% of your qualified business income. So you get a deduction of 20% of your qualified business income. And sometimes that has been missed. In fact, I saw a pharmacy that missed it for three years, and we calculated it was around $90,000 of taxes that were overpaid. They shouldn’t have paid that. So, that’s a big one and can add up. And I know the NCPA and we pushed heavily for pharmacies to be eligible there. And so, you guys are eligible; pharmacies are eligible. So make sure your advisor is taking advantage of that for you.
Another area we typically see is the accrual to cash change in accounting. With the Tax Cuts and Jobs Act that was passed in 2017, which stemmed section 199A, but it also stemmed the ability for pharmacies to switch from accrual method of accounting, to the cash method of accounting for tax purposes. Prior to that Tax Cuts and Jobs Act, pharmacies, generally speaking, had to report for tax on accrual basis. And again, that law allowed pharmacies generally to switch to cash basis. And we still see pharmacies that can take advantage of that, but they are not doing so–that’s pretty common.
And when you do, when you switch from an accrual to cash change in accounting, generally you’re going to have a large write-off because you’re writing off receivables and other items, but those receivables are usually a large portion of your balance sheet there. And when we can write that off, in other words, take it out of income, that creates a pretty big negative adjustment there, and creates a, hopefully a pretty substantial tax savings for you. Now, that being said, we always want to be on accrual base for financial purposes and analyzing how your pharmacy is performing, but for cash, or for tax, cash basis is something to definitely consider for your pharmacy. And we still, again, seeing pharmacies not taking advantage of that easy tax savings opportunity.
Now, we still see pharmacies writing off inventory as well. So, we do see some pharmacies that have gone cash method, but their advisors have written off inventory. The IRS has pretty much said, you can’t do that. Inventory is really its own animal, and they’re going to want to see that inventory on the books. You can’t write off inventory. That’s a mistake we’re seeing more of, we see that out there.
There are some in the industry pushing that, to write off that inventory. We disagree with that. We never held that stance here. And, the IRS agreed, but if you have written off inventory, you may need to start looking at switching back to getting that back on the books, filing the necessary forms, and picking that income back on the books beginning in potentially the 2021 tax year.
Now, another area we typically see missed is perhaps your health insurance, self-employed health insurance not being deducted properly on your personal tax return. And, health insurance is just getting more and more expensive, 10, 15, $20,000 of deduction that’s missed, times the top tax rate, you’re looking at some pretty substantial tax hit there by missing that opportunity.
So those are really the most common things we see in pharmacies, but there’s several others we could get into, but those would be the top tax mistakes we typically see.