Forward-thinking companies, including pharmacies, must continually evolve to stay ahead of the competition and maximize profitability. One critical way to do this is with tax planning, which can significantly impact a pharmacy’s bottom line.
Why Is A Top-Notch Tax Strategy Essential for Pharmacies to Stay Competitive?
Forward-thinking pharmacy companies understand the need for strong tax strategies. Effective tax planning ensures not only compliance with regulations but also optimizes your resources for sustained growth. More money is available for the pharmacy business to use, without having to cut back anywhere. By cleverly leveraging tax incentives, companies can redirect saved funds toward growth, marketing, technology, employee training, and other areas to bolster their competitive edge in healthcare.
A smart and proactive tax strategy fosters adaptability and long-term viability, and allows a pharmacy business time to implement and take advantage of strategies, stay ahead of tax changes, and make the most of tax saving opportunities at any time. Pharmacies that are looking to grow their business need to take advantage of any tax savings they can, to increase their profitability and use that money for strategic growth.
Cutting Edge Strategies
Consider the Right Entity Structure
While a pharmacist starting a business and opening a pharmacy may choose to do so under a partnership or sole proprietorship, incorporating can often provide additional tax advantages. Consulting with a professional to determine the right structure for your business is essential.
Pharmacists, unlike many other health professionals, have the ability to add family members as shareholders in their corporation. This strategy can save hundreds of thousands of dollars in taxes when selling your pharmacy in the future.
Income Splitting for Family Members
Canadian tax rules allow for income splitting, a strategy that involves redistributing income among family members to lower the tax burden overall. Pharmacy owners should be aware of updated Tax on Split Income rules, however.
One strategy, unique to pharmacy and not available to other medical professionals, is income splitting with family members even if they do not work at the pharmacy. If you follow very strict rules, you can split your income without needing to justify the amount or why you paid them in the first place. If done correctly, this strategy can significantly help you reduce taxes paid by your family.
Alternatively, you can hire family members in the business and take advantage of lower income tax rates for those in lower income brackets. Work needs to be legitimate, which may be hard to find in a pharmacy setting. There are some potential roles however, including administrative tasks, managing general inquiries and providing language support for customers, cleaning and maintaining the pharmacy premises, or managing social media accounts.
Small Business Deduction (SBD)
The Small Business Deduction (SBD) is a valuable tax planning tool for eligible corporations and allows qualifying pharmacies to apply a lower corporate tax rate to a portion of their income.
For the first $500,000 of net profit in your pharmacy business, you benefit from the low small business tax rate which can range from 9% to 12.2%, depending on the province the corporation is registered in.
This tax rate is significantly lower than your personal rate and creates a tax deferral – if you leave money inside your corporation, you have more money leftover to invest and grow over time. Compare this to withdrawing money personally, paying tax on the full amount, and investing the leftover which is a much smaller balance.
Investing in Tax-Efficient Investments
By strategically investing surplus funds in assets that generate tax-preferred income, such as Canadian dividends and capital gains, pharmacies can minimize their tax exposure. Getting professional help to build a diversified investment portfolio that aligns with your pharmacy’s financial goals, risk tolerance, and investment horizon, while reducing tax liabilities, is recommended.
Inventory Management Deductions
While pharmacies should remember they can potentially claim deductions for obsolete or expired inventory as applicable, it is more cost effective to develop strategies to optimize inventory management so product does not sit excessively and expire.
Capital Cost Allowance (CCA) for Equipment:
Pharmacies often have expensive, specialized equipment. Leveraging the CCA allows pharmacy owners to claim depreciation on eligible assets, reducing taxable income over time. Ensure you have a comprehensive list of eligible assets to include, such as:
- Analytical instruments
- Diagnostic equipment
- Centrifuges
- Microscopes
- Autoclaves
- Refrigerators
- Incubators
- Compounding hoods
- Other pharmacy-specific equipment, furniture, safety cabinets, shelving, retail equipment, and more.
Professional Fees, Memberships and Continuing Education
Pharmacy owners can deduct professional fees, such as membership fees for pharmaceutical associations or licensing fees. Also, investing in the professional development and continuing education or training of pharmacy staff can be tax-deductible.
Environmental Initiatives
Consumers prefer environmentally-conscious businesses, so implementing environmentally friendly practices, such as energy-efficient lighting or solar power for compounding operations, may make your pharmacy more appealing to customers; plus, you may be eligible for various tax incentives or credits.
Watch for New Tax Opportunities as You Grow
Costs associated with marketing and advertising your pharmacy, including promotional materials and website development, can be deducted.
If you’re growing and expanding services, such as providing immunizations or offering additional health services, you may qualify for specific tax incentives. It’s essential to stay informed about government programs and incentives.
Pharmacies involved in R&D activities like developing new pharmaceutical compounds or improving existing formulations may be eligible for scientific research and experimental development tax credits. You can contribute to the future of the pharmaceutical industry, differentiate your pharmacy, and gain competitive tax advantages.Tax laws and regulations regularly change; staying on top of these, and consulting with tax professionals who specialize in the pharmacy industry is recommended to ensure strategies are tailored appropriately and ensure compliance with current tax requirements. PharmaTax offers special expertise to pharmacists and pharmacy owners, to maximize their tax savings.
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