Is it possible for a recently graduated doctor to form a Professional Corporation for tax purposes while a resident?
Medical residents are granted limited licenses early in residency and a full DEA license after completing some other requirements during residency.
I am wondering if it would be feasible to form a PC and have pay checks from the hospital paid to that corporation. Would this allow a resident to purchase a house or car through the corportation? or start a retirement fund?
Also, would this be a worthwhile venture? Would the cost of managing the corporation outweigh the possible money saved with a $35-40K salary? What about $80-100K?
I have some things to say about this topic, but I’m not going to say them because it sounds like you’re looking for specific legal advice instead of a general understanding of how the law works. You should retain a lawyer and ask him these questions instead of hoping to save a few bucks by depending on anonymous posters on a message board whose bona fides you have no way of checking.
OK, if I understand correctly, you want to create a corporation and be the sole shareholder of it. You would then cause the corporation to be hired as a medical resident at a hospital for which the corporation would be paid a fee (your salary). You would then cause the corporation to buy things for you, pay you a salary, and pay you dividends to get the money out of corporate solution. The whole reason for doing this is because you believe that somehow you will save on your federal income taxes. Also, I’ll go ahead and assume that you’ll elect for the corporation to be taxed as an S corporation (essetially a pass-through entity like a partnership) instead of a C corporation (what you think of as a normal corporation that pays tax itself).
The short answer is that the IRS thought of this game long before you did. By doing the above you will not save on your federal income taxes and you may cause yourself to pay more than if you receive the salary yourself.
The long answer involves a discussion of several principles, namely: (1) the assignment of income doctrine, which says that income must be taxed to him who earns it (you) not to the person that receives it (the corporation); (2) the personal service corporation rules, which disallow a person from saying that a corporation is earning the money when it’s really a single person performing services on behalf of the corporation that is earning money; (3) even if you successfully get the corporation to be the real earner of the money, you won’t be able to save on self-employment taxes by paying yourself a dividend instead of a salary because the IRS will re-characterize some (or all) of the dividend as a salary.
Oh, I forgot to mention that if the corporation buys you a house, then that would be a constructive dividend to you, so you still have to pay tax on the value of the house and you don’t gain anything.
This is actually an interesting question to me, so I checked my Illinois corporation handbook. In Illinois, if your services require a license from the state, then you may form a professional corporation (sometimes also called a service corporation, or sc). Since you do need a license to act as a resident, I’d say you could do it in IL. Corporations are creatures of state law, so you would need to check the specific language of your state’s corporation statute.
For doctors, the main reason to form a pc is to limit individual liability for lawsuits, so tax savings are not usually the driving factor. That said, the pc does get to deduct “business expenses” which may you may not otherwise be able to deduct directly on your individual tax return. (Many pcs have “health benefit plans” which cover everything–glasses, non-scrip meds, etc., with no deductible–allowing the pc to deduct these items as business expenses–part of the “salary and bennies” paid to the pc employee.) This is not a huge tax break, so the cost of maintaining a pc would probably not be worth it if the limit on liability was not the main point.
The pc would be allowed to rent an office for you, but as TaxGuy says, it would be a bad idea for it to buy you a house.
You also want to check with your hospital’s HR dept before doing this–they may not expect a resident to have a pc and you may need to work with them to get them to accommodate your structure.
You do need a local attorney (or at least a tax accountant) to form and maintain the thing for you.
Note that incorporation typically won’t protect you from malpractice lawsuits because, as the (allegedly) malfeasant doctor, you would be personally responsible for the actual malpractice no matter who cashed the patient’s check.
Thank you all for your answers. It seems like the main benefit for an MD PC would be to provide for private practice expenses and for some liability issues, but not specifically to save money on taxes. I’m sure that if it were advantageous for residents, I wouldn’t be the first to inquire about it.