CRNA Tax Deductions
Posted Wednesday, October 19, 2022
WCG has more than 100 Certified Registered Nurse Anesthetists as business owners, and it is one of the fastest growing segments in our client base in 2022. As such, naturally we have had several discussions with CRNAs regarding their tax deductions.
Increased tax deductions is one of the primary reasons to ditch that W-2 job and convert to a 1099 contractor. Prior to the Tax Cuts and Jobs Act of 2017, W-2 employed CRNAs could deduct expenses, such as mileage and home office, associated with their work on Form 2106 (Employee Business Expenses) and eventually on Schedule A of their 1040 tax return. That is no more, but in 1099 land, all these wonderful business tax deductions are alive and well.
And Yes, you might be a CRNA but you are also a business owner when operating as a 1099 contractor. Let’s get some basic housekeeping matters out of the way before we dive into CRNA tax deductions.
Business is business. While being a CRNA has some unique nuances, a 1099 contractor is considered a business owner. Therefore, most of the CRNA tax deductions below are universal to the general business world; we simply put a CRNA spin on them. Everyone wants to feel special, and we get that but the tax code wasn’t written specifically for certain professions or business owners; it was written with a generalist mindset. As such and as small business consultants, we explain and leverage the code to each business owner from their perspective.
Marginal Tax Rate. Quick lesson on small business tax deductions. When you write a check and it has a tax savings element (office expense, 401k, IRA, charity, etc.) it is not a dollar for dollar savings. For example, if you are in the 22% marginal tax bracket, you must write a check for $4,000 just to save $880 in taxes.
Cash Savings or Tax Savings. You can save $50,000 today! Yes, today! You just need to write a $150,000 check to your church. Huh? That might not sound like the best idea to a lot of people since so much cash is leaving. In other words, most people are in the cash-saving business not the tax-saving business. If we can do both, great. However, most tax-savings moves take cash, and cash is what you want to keep. So keep this concept in mind as you review the CRNA business deductions below.
Building Wealth. At the end of your life, you’ll measure your financial success on the wealth you built not the tax you saved. We agree that a part of wealth building includes tax savings, but be careful not to sacrifice wealth for the thrill of a tax deduction (or deferral). Here is an example- let’s say you stuff all your available cash into a tax-advantaged retirement account such as a 401k. A few years go by and a great rental comes on the market but your cash is all tied up in a 401k. You just sacrificed potential building of wealth by not having an intermediate investment strategy for the sake of tax deferrals.
The Trick. Here’s the trick. The Holy Grail if you will. You need to find a way to deduct money you are already spending. Let’s take automobile depreciation. You are already comfortable with automobiles losing thousands of dollars in value especially in the early years, so let’s a find a way to make this degradation in value a tax windfall in CRNA business.
Reimbursed by Agency or Hospital
To attract CRNAs, some agencies, hospitals and clinics will pay for travel, lodging and / or meals with per diem, stipend or some other reimbursement. Cool, right? There are a couple of things to keep in mind on these expense reimbursements-
- You must have incurred an associated expense equal to or exceeding the reimbursement, and any excess reimbursement is considered taxable income (or must be returned, but shockingly exactly 0 people do that).
- Some agencies, hospitals or clinics will add these reimbursements to your daily or hourly rate, and issue a 1099-NEC tax form accordingly. Therefore, this combined amount becomes “top-line revenue” on your business tax return since your tax return revenue must equal or exceed the issued 1099s (yes, the IRS computers verify this). In turn, the reimbursements for these expenses will be taxable income unless you’ve tracked and deducted these same expenses on the business tax return.
We’ve seen it all different ways so the net-net of all this is to track expenses regardless if they are reimbursed or not.
Business Tax Deduction Concepts
There are some over-arching themes and concepts for all small business deductions. The business expense must be-
- Ordinary and necessary (IRS Publication 334), and
- Paid or recognized in the current tax year, and
- Directly related to your business, and
- Reasonable, and not lavish or extravagant (IRC Section 162 and IRS Publication 463).
Let’s break these down. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business.
The expense must be related to your business- that seems obvious. Finally, the expense must not be lavish or extravagant. So, your Board of Directors meeting might spend $500 on catering but a $5,000 expenditure to hold your board meeting in Fiji might be considered lavish and extravagant. Be reasonable out of the gate, and it will be hard for the IRS to knock you off your perch.
A lot of this material comes from Chapter 11 of our book, Taxpayer’s Comprehensive Guide to LLCs and S Corps. Please check it out since we have truncated a lot of the following business tax deductions in this writing.
Here we go… buckle up butter cup because the first CRNA tax deduction is automobiles.
There are two options here. Own the automobile in your business, or own it personally and get reimbursed by the mile. There are two end points to this spectrum. A frugal $40,000 automobile that is driven 15,000 miles a year is probably better suited to be owned personally. This is because of the tax arbitrage that exists in the mileage rate (62.5 cents for the 2022 tax year) since your automobile likely operates for less than the tax-free reimbursement.
A luxury $90,000 automobile that is driven 8,000 miles a year for your CRNA business is better suited to be owned by the business. It’s the $60,000 automobile that is driven 8,000 miles a year that can be a chin-scratcher… own it personally or own it in the business… it might not matter either way.
We can help you decide which way to go. A few more pointers on automobiles-
- If you own the automobile personally and your S Corp is reimbursing you for the mileage, then all expenses must be paid by you, the person, and not the business. We see this messed up all the time. No biggie, just stop doing it.
- If you own the automobile in your business, you will deduct actual expenses such as gas, insurance, maintenance, etc. You cannot deduct mileage and deduct actual expenses. You must choose one or the other.
- It is likely your CRNA business is an LLC taxed as an S Corp. Therefore, the tax deduction for mileage is done on the S Corp tax return when the business reimburses you, the employee, for the business use of a personal automobile. In other words, there is not a mileage deduction available to an S Corp unless it is a reimbursement made to an employee (as a sidebar, an S Corp owner is both a shareholder and an employee).
We could go on and on like Journey’s Don’t Stop Believing, but we need to move along. One more tidbit- rental cars used while doing a temporary duty assignment away from your tax home is a common CRNA tax deduction.
The home office tax deduction by itself can be lousy. A typical business owner with a typical home will see $200 to $250 cash in their pocket with a home office tax deduction. Why? The bulk of the home office expense, such as property taxes and mortgage interest, are already deducted on Schedule A of your individual tax return. The $200 to $250 comes from insurance, HOA dues, utilities and maintenance that are otherwise non-deductible. We are not trying to value-assess your money, and certainly $200 to $250 is nice, but we want to illustrate that it is not some massive hammer of a tax deduction (but there is a caveat below).
Here is another example- $100 in cleaning supplies (which is a lot of cleaning supplies even for the most germaphobic Howard Hughes type) will be $100 x 5% (office size relative to house) x 37% (tax bracket) or $1.85 cash in your pocket. You can’t even go to Taco Bell on that.
However, where the home office has a ton of tax deduction potential is mileage. This is the caveat alluded to earlier. Without a home office, your mileage or automobile expense to your contractor gig location is considered commuting and therefore non-deductible. Yeah, that stinks, but check the home office box, and boom, your mileage is suddenly business travel between work locations.
Cell Phone and Internet
Cell phone expenses are generally mixed-use between personal and business unless you have two cell phones. Same with internet. The business need for cell phones and internet connectivity is huge for CRNAs since managing cases and schedules is a continuous and require business activity. These mixed-use expenses are paid for personally and then reimbursed by the business based on a percentage of business use.
Most CRNAs see anywhere from 60% to 80% business use for cell phones and internet.
Sidebar: Reimbursements for mileage, home office, cell phone and internet are usually done at tax time. Let’s say over the course of the year you take out $200,000 as shareholder distributions from your 1099 CRNA business. We would reclassify a portion of these distributions as reimbursements. Therefore, your $200,000 in distributions might actually be $180,000 in distributions with $20,000 as CRNA tax deductions.
Your lunches in the hospital cafeteria are not deductible. However, if you meet with a colleague to discuss the latest locums contract you are considering, and happen to have a meal with this business meeting, then that becomes a tax deductible business meal.
If you are traveling away from your tax home, such as a small weekend jaunt to another hospital, then your travel meals are tax deductible. The two keys are a) away from your tax home and b) substantial rest (hotel or lodging).
Locums or Temporary Duty Assignments (TDY)
The IRS sums this up nicely in IRS Topic 511 Business Travel Expenses which comes from IRS Publication 463-
You’re traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals or lodging in Milwaukee because that’s your tax home. Your travel on weekends to your family home in Chicago isn’t for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining your main place of business, take into account the length of time you normally need to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time you spend at each location.
You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home. However, you can’t deduct travel expenses paid in connection with an indefinite work assignment. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if you realistically expect that you’ll work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for one year or less, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
If you take a locum CRNA position for three months in a lovely Colorado mountain town because the go-to CRNA is on maternity leave, your travel, lodging and meals are all deductible. Yay! There are some other deductions too, but those are the big ones.
Malpractice insurance is an easy one so we will move along.
Health insurance which includes dental and vision is fully deductible even if you cover your spouse and / or children. What is also great about health insurance is that the IRS considers it a fringe benefit for certain shareholders, and it is added to overall officer compensation on an S Corp tax return and therefore deducted. Why is this great? Good question! It reduces the amount of actual salary paid and therefore the amount of Social Security and Medicare taxes.
Let’s say your reasonable officer compensation is $100,000. If you also have $10,000 in health insurance, your actual salary will be $90,000 yet your officer compensation will show $100,000. If you are in the 37% marginal tax bracket, this little health insurance deduction saved you 37% in income taxes plus 15.% in Social Security and Medicare taxes. So, this $10,000 actually costs you $4,800 in cash. Sure, it still stinks but it has less stink.
Disability insurance works in a similar way. Yes, you should have your disability insurance paid by the business. No, it is not an income tax deduction; otherwise the benefits paid would be taxable income. But! It adds to the reasonable salary test like the health insurance example above but only for Social Security and Medicare. Said in another way, you are saving 15.3% in taxes with disability insurance being paid by the business.
You can deduct education expenses if they improve your current work skills. For example, Alesia Quante’s 1099 CRNA Freedom Masterclass is improving your current work skills by making you a more informed business owner and improving your overall CRNA contractor work skills. There are several tax court cases where people have deducted their MBA education under similar pretenses (some successful, and others not so much… it is oddly divided frankly).
Of course, any education or classes required for recertification or continuing education as required by your profession is a CRNA tax deduction.
The tax court is very clear on this. Any clothing that is suitable for everyday use is not tax-deductible. However, there are some finer points to this. What about shoes that are only allowed in the operating room? Does this rule make shoes a de facto required uniform which is governed by a handbook somewhere, and therefore deductible? Perhaps.
CRNA Tax Strategies
There are some other CRNA tax deductions that are akin to tax strategies. We won’t expand on these here, but be aware of-
- Adding Spouse to Payroll
- Adding Children to Payroll
- Using a 401k Plan Over a SEP IRA
- Roth 401k versus Pre-Tax 401k
- Tax-Free Rental of Your Home
You can see our blog post on overall tax reduction strategies for more explanation. We also have a tax strategy tool that produces a report detailing each tax strategy, the tax savings and the rules. It is super cool, and provides a great what-if discussion on various tax moves. Ask us how.
With any business, and not just CRNAs and not just S Corps, money management is super important. Here are some quick guidelines-
- Have a separate checking account for your business activities.
- If the expense is 100% business, then have the business pay for it. For example, a meal with a business associate.
- If the expense is mixed use such as a personally owned automobile or cell phone, then pay for it personally and then get reimbursed by your business.
- If you believe a cash outflow is an expense, pay for it with business funds and track it. We will review during tax return preparation. If it is later determined to not be deductible, we will simply reclassify the expense as a shareholder distribution. This does not mean pay everything including your home mortgage with business funds; that is co-mingling and considered bad. But an oopsie here and there because you a CRNA and not an accountant is okay.
CRNA Tax Deductions Summary
Every business is distinctive, but the rules of tax deductions are universal. We slanted the above the tax deductions for CRNAs, but the underlying eligibility of the tax deduction is not unique.
Wanna chat about your situation? Let’s do it.
Jason Watson, CPA is a Senior Partner of WCG Inc., a business consultation and tax preparation CPA firm located in Colorado Springs, and is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps which is available online and from mostly average retailers.