Dr. John Brown is a physician who expects to make $150,000 this year from his me

Question

Dr. John Brown is a physician who expects to make $150,000 this year from his medical practice. In addition, Dr. Brown expects to receive $10,000 dividends and interest income.Last year, on the advice of a friend, Dr. Brown invested $100,000 in Limited, a limited partnership. He spends no time working for Limited. Limited’s operations did not turn out exactly as planned, and Dr. Brown’s share of Limited’s losses last year amounted to $15,000. Dr. Brown has already been informed that his share of Limited’s losses this year will be $10,000. In January of the current year, Dr. Brown set up his own laboratory. Originally he intended to have the lab only do the work for his own practice, but other physicians in the area were impressed with the quick turnaround and convenience that the lab provided and began sending their work. This year, Dr. Brown estimates that the lab will generate $30,000 of taxable income. The work in the lab is done by two full-time qualified laboratory technicians. A part-time bookkeeper is hired to keep the books. Dr. Brown has spent 320 hours to date establishing and managing the lab. He plans to hire another technician who will also manage the lab so that it can operate on its own. In November, Dr. Brown calls you requesting some tax advice. Specifically, he would like to know what actions he should take before the end of the year in order to reduce his tax liability for the current year. Write a memo to Dr. Brown, detailing your suggestions. His address is: Dr. John Brown, 444 Physicians Drive, Suite 100, Anytown, USA 88888.

Explanation / Answer

When you make more you are obviously taxed more and in your case you made $150,000 plus $10,000 which nets $160,000 in taxable income. Moreover, this means right now you are in the 33% bracket when you also add $30,000 taxable income from what the lab generated. Since the goal of a tax preparer is to reduce tax liability then I would suggest you doing the following…

By not spending more the 500 hours in the lab this year you can qualify in an activity in which you “materially participate” which means something in which you can profit although not actively in it. This in turn will allow you to get last year’s losses of $15,000 as well as this year’s loss of $10,000 because IRS will categorize them as passive losses.

In conclusion, this is only a strategy and in order to make a more concrete plan then I must go further and check out more details.

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