What is your opinion on our office dispute?

[WhiteOleander]

We have a dispute going on in our office right now.

Taxpayer is a medical doctor. He is completely retired. Does not do any part time work or consulting.

He wants to deduct the costs of renewing his medical license and narcotics license on Sch A Misc subject to 2%.

Is this permitted since there is no SE income related to the expense? Can it be deducted because the Dr. wants to be able to work in his profession sometime in the future if necessary?

I won't say what side I'm on so the others can't say that my opinion influenced the answers.

What say you?

[Larmil]

We have a dispute going on in our office right now.

Taxpayer is a medical doctor. He is completely retired. Does not do any part time work or consulting.

He wants to deduct the costs of renewing his medical license and narcotics license on Sch A Misc subject to 2%.

Is this permitted since there is no SE income related to the expense? Can it be deducted because the Dr. wants to be able to work in his profession sometime in the future if necessary?

I won't say what side I'm on so the others can't say that my opinion influenced the answers.

What say you?

I would guess no in the situation you describe. However, I have a retired MD who volunteers at the VA Hospital. I take the expenses you list as an out of pocket charitable contribution.

[geekgirldany]

I say that it can not be deducted. In my opinion if he is completely retired and is not currently working in the medical field then it is not deductible. He has no employer that makes it necessary to keep the license. Do not think he could deduct it under job search expense either because he is not actively looking for a job.

lets see what everyone one else has to say

[S T]

Subject to 2%

We have also had the discussion that sometimes you can still place on the Schedule A subject to 2%, the client sees it - however subject to the 2% deductible of AGI there ends up being no effective tax deduction or benefit.

Sometimes, I have just had to do this to appease the client as they just don't seem to understand why they can't deduct the costs. I have that with some retired teachers on an $80 deduction for Associations, etc.

Being retired - I say no tax deduction, however, Larmil has an approach that I had not thought of, if your t/p is involved in meaningful hours of volunteer work at some local hospital or clinic.

What is the cost of his licenses that he wants to take as a deduction?

Sandy

[Corduroy Frog]

What manner of income?

If he were to spend a small amount of time working (as he purports his wishes), would he be working for a W-2, or a schedule C? Does he know? Do you know?

I would have no qualms whatsoever in deducting these as a schedule C expense if sometime during the next 12 months, he works and shows revenue on the schedule C. So long as this happens, I would deduct it, even if the revenue is in a different calendar year.

If his retirement and investment income is of much value at all, the 2% floor is going to suck up any benefit this deduction may bring, provided he can itemize at all. (No SIT in Texas, and probably no interest if he is old enough to retire and has his home paid off.)

My guess is that, all things being known, there is in fact some free lance work reportable. Especially if he is paying professional insurance -- no reason to pay this if he is totally inactive.

[erchess]

interesting question

This has never come up in my work but in the first tax course I took to prepare me for my first job in this industry I was taught that if a person retired from a trade or profession and wanted to keep paying for organization memberships, keep renewing one or more licenses and keep doing continuing education that was required to keep the licenses and memberships, the expenses were misc. itemized deductions subject to the 2% of agi limitation regardless of what the tax treatment of them would have been when the person was practicing the trade or profession.

I tentatively disagree with Snags about what it must mean if he is keeping up his malpractice insurance. As far as I know, all E and O insurance actually available to tax and accounting professionals is "Claims Made". I am thinking Malpractice insurance for Doctors may work the same but I don't know. My understanding is that if I want to retire I will need to keep making payments to my insurance company until the statute of limitations for someone to sue me has expired. I am told that the rates will be lower than if I were continuing to practice. Snags am I wrong about the way our insurance works or do you have knowledge that Medical Malpractice Insurance normally works differently?

[Snaggletooth]

Don't Know

Erchess, don't know how Medical Insurance works, but I do know that for our profession, you are quite correct in that we should continue to pay for at least two more years if we wish to cover ourselves for prior malpractice.

Interesting note - and thanks for your post - revealed an element I hadn't thought about.

However, if the physician is required to keep insurance beyond his retirement, I do believe this should be a Schedule C deduction even if there is no revenue. I have known situations where business interest could be deducted on a Schedule C after the business had shut down, because the taxpayer had to continue paying on a business loan. I believe an elongated insurance requirement should be allowed to fall into the same category.

[Bees Knees]

Regulation Section 1.162-1 says in part:

Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, … The full amount of the allowable deduction for ordinary and necessary expenses in carrying on a business is deductible, even though such expenses exceed the gross income derived during the taxable year from such business…

There is no question that professional license fees paid by a medical doctor that allow him or her to practice under state law are deductible as ordinary and necessary expenses, even if such expenses exceed gross income. This is true even if the doctor is temporarily unemployed. Paying relatively small license fees to maintain the right to practice are far less expensive than having to go back to school to get a new license.

The key to this issue centers on whether or not the taxpayer is still in the profession of being a medical doctor. A retired medical doctor could continue to take on occasional part time work, in which case the license fees are deductible. This would be true even in years where there is no income.

On the other hand, if the taxpayer has no intention of ever going back to work even on a part time basis, the expense is no longer ordinary and necessary. I would ask the client, why are you continuing to pay these fees? If the answer is: “You never know, I might decide to go back to work.” If that is the answer, then I would deduct the expense. If the answer is: “I get a professional courtesy discount at our local hospital if I maintain my license,” then I would say no to the deduction because the expense is incurred solely for the purpose of receiving a personal benefit.

I would tend to give the client the deduction if he wants it. When people retire, they really do not know for sure what they will do in the future. Many go back to work after finding life at home watching TV all day long boring. Chances are the real reason the doctor wants to continue to pay the license fees is so that he has the option of going back to work in the future if he wants to. I would also, however, place a limit on how many years from retirement he continues to take the deduction. Obviously if he is 95 years old, has been retired for 30 years, and is living in a nursing home, chances are he will never go back to work.

[New York Enrolled Agent]

Bees - I think the Tax Court might disagree with you. (caps added)

Here's a piece of TC Memo 1978-344. This guy was an accountant - I think a substitution of "doctor" for "accountant" would not change the outcome.

During 1974, petitioner was fully retired. He earned no income as an accountant and there is nothing in the record to indicate that he had any intention or plan to resume practice as an accountant. EVEN if he had had such an intention, it would NOT be sufficient to sustain his claimed deductions. Expenditures incurred to enable a taxpayer to resume the active conduct of his profession at some unspecified later date are not deductible. See Canter v. United States, 354 F.2d 352 [ 16 AFTR 2d 6051] (Ct.Cl. 1965); Corbett v. Commissioner, supra; Owen v. Commissioner, 23 T.C. 377 (1954). Clearly no temporary hiatus in petitioner's activities is indicated. Compare Haft v. Commissioner, 40 T.C. 2 (1963), with Corbett v. Commissioner, supra. Nor can petitioner obtain any sustenance from his assertion that his expenditures were designed to enable him to continue as a member in good standing of the accounting profession. See Wyatt v. Commissioner, 56 T.C. 517, 520 (1971).

I would also take a look at Rev Ruling 77-32. No deduction for the doc in that situation.

[Snaggletooth]

Audit Experience

I had a client in the 1980s who renovated an old building into a hardware store. Big time money and a $250,000 loan, during a time of high interest rates.

Survived a couple of tough years, then a Home Depot came to town. Business, already struggling, died. Guy ended up working as an insurance adjuster, W-2 income only.

He had to pay interest on the loan for another four years. I continued to prepare a Schedule C with no income, and no line item whatsoever except for interest expense. The deduction on Schedule A would have been much less benefit as he was only on the threshold of itemizing. After two years of this, his return was selected for audit, circa 1986.

The audit period covered the two years of deducting interest only, as well as the final year of operations, which was a whopping loss, which wiped out ALL of his wife's income for that year and almost became an NOL.

We took some $250 in travel for which he had no receipts, and he was dinged for that. But they told him he could file a Sch C for the interest expense until the loan was paid off.

[Burke]

The difference in Snag's situation of business interest and the TC Memo quoted in NYEA's post, is that in the case of the loan, it was originally taken out for the business, and the TP was obligated to pay it off, so the interest remains business interest. Renewing a license is not an obligation of the TP after retirement, so it is hard to meet the ord & necessary requirement. I have a former VA nurse who retired on disability (civil service) many years ago, who still renews her license, pays her assoc dues, etc. I do not take a deduction for any of these items. Thanks to NYEA for the reference. My vote would be in the No column.

[Bees Knees]

The citations are good...in the case where a professional has indefinitely suspended practice. That is the assumption made in Rev. Rul. 77-32, and the cited court cases appear to have similar facts and circumstances.

I would still take the deduction if the client can tell me he does have definite plans to practice again, perhaps on a part time basis.

[New York Enrolled Agent]

I had a client in the 1980s who renovated an old building into a hardware store. Big time money and a $250,000 loan, during a time of high interest rates.

Survived a couple of tough years, then a Home Depot came to town. Business, already struggling, died. Guy ended up working as an insurance adjuster, W-2 income only.

He had to pay interest on the loan for another four years. I continued to prepare a Schedule C with no income, and no line item whatsoever except for interest expense. The deduction on Schedule A would have been much less benefit as he was only on the threshold of itemizing. After two years of this, his return was selected for audit, circa 1986.

The audit period covered the two years of deducting interest only, as well as the final year of operations, which was a whopping loss, which wiped out ALL of his wife's income for that year and almost became an NOL.

We took some $250 in travel for which he had no receipts, and he was dinged for that. But they told him he could file a Sch C for the interest expense until the loan was paid off.

Snags

Burke is correct - a different set of circumstances. But, there is authority for your position. Here is the headnote for Rev Ruling 67-12 (caps added)

[start]Ordinary and necessary expenses, incurred in a trade or business in prior years and paid in the current taxable year, by an individual taxpayer using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Internal Revenue Code of 1954 EVEN THOUGH the trade or business has been discontinued. [end]

For Bees, I would just repeat the words of the judge: EVEN if he had had such an intention, it would NOT be sufficient to sustain his claimed deductions. Expenditures incurred to enable a taxpayer to resume the active conduct of his profession at some unspecified later date are not deductible.

Those definite plans better be real definite. The penalties in §6694 give me concern.

[gkaiseril]

He should also have malpractice insurance, professional society dues, continuing education, etc. besides federal and state registrations to consider.

Unless he is performing a service as a medical doctor for pay or as a charity act, I would allow the expensed up to the revenue (self employment or wages) or all of the 2% miscellaneous expenses up to 2% of AGI.

This is the reason many attorneys keep some office hours and perform some legal work after retirement from full time work.

[Bees Knees]

For Bees, I would just repeat the words of the judge: EVEN if he had had such an intention, it would NOT be sufficient to sustain his claimed deductions. Expenditures incurred to enable a taxpayer to resume the active conduct of his profession at some unspecified later date are not deductible.

Well the judge wasn't ruling on someone with definite plans, so I'm not worried about that statement. If I were arguing the case before a judge, I'd cite the depreciation example. Why have courts ruled depreciation is still allowable when assets sit idle and the business collects no income? Doesn't seem consistent to me. If the business is temporarily on hold for whatever reason with full intention of starting up again, I would think I could make a good case that the expenses incurred are ordinary and necessary.