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CPA help – Can you deduct initial state license fees from Sch C income (trainee)?

Home Tax Reduction CPA help – Can you deduct initial state license fees from Sch C income (trainee)?

  • Avatar exces6 
    Participant
    Status: Resident
    Posts: 3
    Joined: 02/06/2019

    Hi,

    I’m trying to clear up some confusion around whether initial state medical licensing fees are deductible if you acquire your full state medical license to moonlight, specifically in the setting of being self-employed and receiving all moonlighting income on 1099 (NOT itemizing).

    Pub 529 states “You can’t deduct professional accreditation fees such as the following. (…)

    • Medical and dental license fees paid to get initial licensing.

    However, Pub 529 is introduced as describing deductions that can be taken on Schedule A (if an employee and itemizing, NOT as an independent contractor). Pub 334 refers to potentially being able to deduct “licenses and regulatory fees,” but then refers to Pub 535 to determine if they are deductible, but I find Pub 535 unclear (it refers to government licenses needing to be amortized as Section 197 intangibles and doesn’t mention medical practitioners specifically).

    So, while it seems pretty clear from this and other posts here that initial licensing fees cannot be deducted by anyone who is itemizing, does that also apply to those who take their deductions on Schedule C (i.e. can you deduct these costs if your full license was obtained in order to earn income as an independent contractor)?

    I’m also a little unclear on what counts as initial licensing. My residency program paid for my physician-in-training permit, but I paid for my own full medical license (which was necessary for moonlighting but supercedes/replaces the in-training permit once you have one). Would the fact that I already had an in-training permit count as the “initial license,” meaning that I can deduct the full medical license regardless of the answer to my first question?

    Thanks in advance, I know this is a bit complicated!

    #188644 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 677
    Joined: 03/09/2017

    I belong to the camp that thinks that initial licensing is USMLE testing, therefore yes, I’d deduct it. If you need it for both w2 and 1099 jobs, you’d allocate its deduction amount based on income ratio.

    #188679 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7117
    Joined: 01/09/2016

    The deduction for initial licensing fees is for the fees necessary to on-board you to practice as a physician. For example, when I sat for the exam to become a CPA, those fees weren’t deductible because, when I paid them, I was not a professional. So whatever the equivalent is for physicians (assuming it’s what @dreamgiver posted?) is not deductible.

    You stated this was for “state” licensing. I would expect that to be deductible.

    Beginning in 2018, employee business expenses are no longer deductible, so the itemizing part is incorrect. You must have gotten a copy of an outdated pub 529.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #188857 Reply
    Avatar exces6 
    Participant
    Status: Resident
    Posts: 3
    Joined: 02/06/2019
    Disability Insurance

    Thanks for your responses! @jfoxcpacfp, I wish the IRS would provide some clear guidelines, as I feel like physician trainees are a fairly common scenario and have a somewhat unique situation where it takes multiple steps in order to practice as a professional (and therein lies the confusion on what constitutes initial entry/on-boarding to practice).

    Here’s a little extra detail, in case it helps. For medicine, the steps to licensing are as follows:

    1. Exam fees (USMLE, etc.): Multiple tests, the first two are taken in medical school and are required to get into a residency training program, the third required to graduate from residency. If you complete the first two tests and graduate from medical school, you are considered a doctor, but you can’t practice until you get a training permit/full license (does earning the degree make you a “professional” even though more training is required to practice independently?).

    2. Physician-in-training permit from individual state medical board: Paid for by many residency training institutions, allows you to practice medicine under varying degrees of supervision only in your residency training environment. Most take more exams at this point in order to become board certified in a specialty, but that may be getting into the weeds here.

    3. Full medical license (what I’m talking about here in terms of deducting on Schedule C): supersedes/replaces the training permit once you have it (so once you get it it allows you to practice in your residency training program and also independently in some situations, like moonlighting in an urgent care center, etc.). Not required during residency, but required to practice medicine after residency. Required to apply for this earlier than you normally would if you want to moonlight at many institutions.

    Are you considered a professional already by the time you’ve gotten your medical degree and have been practicing in residency, albeit under supervision (steps 1 and 2 above)? That’s where my confusion lies. You wouldn’t be able to go out and “hang up your shingle” at this point since you lack a full license, but you can practice under supervision. If you are already considered a professional, does that mean the initial licensing fees paid to get your full medical license (step 3) are deductible? The IRS seems to be clear that the renewal fees of such a license are deductible, so it’s really the first/initial payment on the full medical license that is confusing me.

    Thanks in advance; I hope the above isn’t too confusing!

    #189052 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 677
    Joined: 03/09/2017

    Thanks for your responses! @jfoxcpacfp, I wish the IRS would provide some clear guidelines, as I feel like physician trainees are a fairly common scenario and have a somewhat unique situation where it takes multiple steps in order to practice as a professional (and therein lies the confusion on what constitutes initial entry/on-boarding to practice).

    Here’s a little extra detail, in case it helps. For medicine, the steps to licensing are as follows:

    1. Exam fees (USMLE, etc.): Multiple tests, the first two are taken in medical school and are required to get into a residency training program, the third required to graduate from residency. If you complete the first two tests and graduate from medical school, you are considered a doctor, but you can’t practice until you get a training permit/full license (does earning the degree make you a “professional” even though more training is required to practice independently?).

    2. Physician-in-training permit from individual state medical board: Paid for by many residency training institutions, allows you to practice medicine under varying degrees of supervision only in your residency training environment. Most take more exams at this point in order to become board certified in a specialty, but that may be getting into the weeds here.

    3. Full medical license (what I’m talking about here in terms of deducting on Schedule C): supersedes/replaces the training permit once you have it (so once you get it it allows you to practice in your residency training program and also independently in some situations, like moonlighting in an urgent care center, etc.). Not required during residency, but required to practice medicine after residency. Required to apply for this earlier than you normally would if you want to moonlight at many institutions.

    Are you considered a professional already by the time you’ve gotten your medical degree and have been practicing in residency, albeit under supervision (steps 1 and 2 above)? That’s where my confusion lies. You wouldn’t be able to go out and “hang up your shingle” at this point since you lack a full license, but you can practice under supervision. If you are already considered a professional, does that mean the initial licensing fees paid to get your full medical license (step 3) are deductible? The IRS seems to be clear that the renewal fees of such a license are deductible, so it’s really the first/initial payment on the full medical license that is confusing me.

    Thanks in advance; I hope the above isn’t too confusing!

    Click to expand…

    You forgot the specialty board exams, written and oral….As far as I know there is no specific guidance from the IRS for the amount of detail you are considering. You need to have passed USMLEs in order to qualify for a state medical license so that’s where it stops for me.

    @jfoxcpacfp the USMLEs are the US Medical Licensing Exams, 3 of them (also colloquially called the ‘steps’). Step 1 is taken half way through med school, step 2 before you graduate (won’t graduate without passing those 2), step 3 during first year of residency. After you pass step 3 you can apply for a state medical license. During residency there are yearly exams (usually called in-training exams) to prepare for board exams (specialty board certification). Board exams timing depends on specialties, some during residency, some a couple of years afterward, usually a written portion and an oral portion taken months if not years apart. The expensive ones are the steps (mostly because you are a poor student) and especially the board exams which can run 3-5k depending on specialty, not counting travel and lost income from missed days at work, plus ongoing yearly fees for the rest of your career

    #189059 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7117
    Joined: 01/09/2016

    Thanks, guys – very helpful for me, and also for general knowledge. I’ve never had it laid out for me and it always seemed awkward to ask a client.

    I agree with Dreamgiver – once you pass the USMLEs, I’d start deducting the fees. For practical purposes, the IRS must use language that will apply generally to all professions. Of courses, there are nuances and terminologies among professions requiring you to use your own judgment. In this case, you are a professional after USMLEs, in my opinion, and I would say the same if you were a client. Demonstrating a willingness and intent to follow the law gives you a degree of latitude even if you were ever to be audited.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #189064 Reply
    Liked by Dreamgiver
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 1783
    Joined: 09/18/2018

    USMLE =. CPA EXAM
    Non-deductible, both are standard test that qualify you to practice and use a professional designation.

    State licenses are a registration requirement, not a certification requirement. To work in a state physically, a state requires proof that you are a professional. It’s common to be licensed in multiple states. You could practice twenty years and move to another state. They aren’t prohibited, deduct them.

    #189201 Reply
    Liked by Dreamgiver
    Avatar exces6 
    Participant
    Status: Resident
    Posts: 3
    Joined: 02/06/2019

    Great, thanks everyone! I appreciate all the help!

    #190005 Reply

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