Starting a Medical Practice: The Tax Guide Before You Sign a Lease | SDO CPA

Starting a Medical Practice: 9 Tax Moves to Make Before You See Your First Patient

Most physicians spend months planning the clinical side of their practice — and about a week on the tax structure. That imbalance is expensive. The entity you form, the elections you file, and the accounts you open in your first 90 days will shape your tax bill for years. Get them right early and you keep more of what you earn. Miss them and you’re paying a premium that compounds every year you’re in practice.

Starting a medical practice taxes correctly means making specific decisions in a specific order. This isn’t about complicated strategies. It’s about not missing the straightforward stuff that has a hard deadline. The 9 moves below are ordered the way they need to happen — because some of them unlock others, and a few of them can’t be undone once the window closes.

If you’re in pre-opening mode right now, read this before you sign a lease, hire a biller, or open a bank account. The sequence matters.

What tax structure should a new medical practice use?

Most new medical practices should form a PLLC or PC (depending on their state), then file Form 2553 to elect S-Corp status with the IRS. This structure lets you split practice income into a W-2 salary and distributions — only the salary portion is subject to FICA taxes. The election must be filed within 75 days of entity formation. Startup costs up to $5,000 are immediately deductible in your first year under Section 195, with the remainder amortized over 15 years. Work with a CPA familiar with physician tax planning before you form the entity.

Key Takeaways

• Choose your entity type before you sign anything — leases, bank accounts, and hiring decisions should come after entity formation, not before
• File Form 2553 within 75 days of formation — the S-Corp election deadline is hard; missing it costs you a full year of potential FICA savings
• Startup costs up to $5,000 are deductible in year one under Section 195, with the remainder spread over 15 years
• Medical equipment qualifies for Section 179 immediate expensing — up to $2,500,000 in 2026 if placed in service before December 31
• You need a business EIN, a separate business bank account, and payroll running before your first paycheck as an S-Corp owner
• Your first-year tax bill will likely be larger than expected — plan for quarterly estimated payments from the start

Move 1 — Choose Your Entity Before You Do Anything Else

The entity type you form determines which tax elections are available to you, how your income is taxed, and what you can deduct. Changing your structure after you’ve opened creates complications — and in some cases triggers a taxable event.

For physicians, the two common options are a Professional Limited Liability Company (PLLC) and a Professional Corporation (PC). Which one is available depends on your state. Texas, for example, allows physicians to form a PLLC. Some states require a PC for licensed medical professionals. Both structures can elect S-Corp tax treatment with the IRS.

A quick decision framework: if your state allows a PLLC and you don’t have co-owners from outside your profession, a PLLC is typically simpler to maintain. If you’re in a state that requires a PC, or if you’re partnering with a hospital system or a non-physician business partner, your options narrow.

The choice also matters for liability protection, creditor rules, and how your operating agreement is structured. Get this decision made with legal and tax counsel before you sign a commercial lease or open any accounts.

Additional resources: PLLC vs PC for doctors and healthcare PLLC formation.

Move 2 — File Your S-Corp Election Immediately

Once your entity is formed, you have 75 days to file Form 2553 with the IRS. That’s it. Miss that window and you’ll be taxed as a disregarded entity (single-member PLLC) or a C-Corp (PC) for the entire tax year.

For an existing entity converting to S-Corp taxation — say you formed your PLLC last year and want to switch tax treatment — you must file by March 15 of the year the election takes effect.

What the S-Corp election actually does: it lets you split your practice income into two buckets. You pay yourself a W-2 salary, which is subject to FICA taxes (Social Security and Medicare, totaling 15.3% on the employer and employee side combined). Income above your salary comes out as a distribution, which is not subject to FICA. In a high-earning practice, this structure can reduce your payroll tax exposure significantly — though the exact benefit depends on your income level and salary.

The IRS does grant late election relief in some circumstances, but it requires additional paperwork, is not guaranteed, and creates uncertainty. File Form 2553 on time.

Related guides: Form 2553 election guide and S-Corp for doctors.

Move 3 — Set Up Your Business Infrastructure Before Day One

Your entity is formed. Your S-Corp election is filed. Now build the infrastructure that keeps your books clean and your entity respected.

1. Obtain your EIN from the IRS — free, instant, available at irs.gov/ein. You need this before you can open a business bank account or set up payroll.
2. Open a dedicated business checking account — no commingling personal and business funds. Commingling is one of the fastest ways to pierce the corporate veil and lose liability protection.
3. Set up payroll — as an S-Corp owner, you’re required to pay yourself a W-2 salary. That means running payroll from the start, withholding taxes, and making payroll tax deposits on schedule.
4. Draft and sign your Operating Agreement or Shareholder Agreement — this is the governing document for your entity. It doesn’t need to be complex for a solo practice, but it needs to exist.
5. Register for state business taxes if applicable — Texas has no individual income tax, but some states require registration and estimated payments at the state level.
6. Set up accounting software from day one — QuickBooks or a comparable platform. Starting clean from your first transaction is far easier than reconstructing a year of commingled transactions after the fact.

Move 4 — Document Your Startup Costs

Section 195 of the tax code allows new businesses to deduct up to $5,000 in startup costs in their first year of operation. That deduction phases out dollar-for-dollar once total startup costs exceed $50,000. Costs above the immediate deduction threshold are amortized over 15 years (180 months).

What qualifies as a startup cost:

• Legal fees to form your entity
• CPA or consultant fees for startup planning
• Initial advertising and marketing costs before opening
• Medical board application and licensing fees
• Costs to analyze potential practice locations
• Pre-opening staff training
• Lease negotiation and review costs

What doesn’t qualify: ongoing operating costs that begin once the practice opens. Those are just regular business expenses, fully deductible in the year incurred.

Start tracking expenses from the day you decide to open a practice — even before the entity is formally created. Keep receipts and categorize everything. You want a clean record when it’s time to file.

IRS guidance on startup cost treatment: IRS Revenue Procedure 2004-52.

Move 5 — Buy Equipment Strategically

Medical equipment purchased in your first year can often be fully expensed through Section 179, which lets you deduct the full cost of qualifying property in the year it’s placed in service rather than depreciating it over several years.

The Section 179 limit for 2026 is $2,500,000. That covers most startup equipment purchases for a solo practice or small group.

What qualifies: diagnostic equipment, exam tables, surgical instruments, computers and servers, EHR hardware, dental chairs, imaging equipment, and most tangible business property used in the practice.

Timing is critical. Equipment must be purchased and placed in service before December 31 of the tax year. A purchase made on December 30 qualifies. A purchase made on January 2 of the following year does not.

On the lease-vs-buy question: buying lets you take Section 179. Leased equipment has different treatment — lease payments are deductible as a business expense, but you don’t get the upfront deduction that Section 179 provides. Which structure makes more sense depends on your cash position, financing costs, and overall tax picture for the year.

Confirm the current Section 179 limit with your CPA — it’s adjusted annually. Full guide: Section 179 deduction.

Move 6 — Set Your Physician Salary Correctly from Day One

As an S-Corp owner, you’re required by the IRS to pay yourself a “reasonable” W-2 salary before taking distributions. Setting your salary too low — to minimize FICA taxes — is a documented IRS audit trigger.

Setting it too high relative to your practice income means you’re paying FICA on more than you need to.

New practices have some flexibility in the first year when revenue is low. If your practice generates $80,000 in net income in its first partial year, a salary of $40,000 may be defensible. The key is documentation: what would you pay an equivalent employed physician for similar work?

MGMA compensation data is the standard reference. Your CPA can help you set a salary that’s defensible and tax-efficient. Establish this before your first payroll run — retroactive payroll corrections are messy and draw attention.

Reference guide: physician reasonable compensation.

Move 7 — Set Up Retirement Accounts Early

First-year physicians frequently skip retirement accounts. The reasoning is usually “I’ll set it up once things stabilize.” That decision forfeits a deduction that can never be recovered.

Your retirement account options as a practice owner:

Solo 401(k): The most flexible option for a solo practice. In 2026, you can contribute up to $72,000 combined (employee deferrals plus employer contributions). The plan must be established before December 31 of the tax year, though you have until your tax filing deadline to fund it.

SEP-IRA: Simpler to set up and maintain. Contribution limit is 25% of W-2 compensation (up to $72,000 in 2026). Must be established and funded by your tax filing deadline, including extensions.

Defined Benefit Plan: More complex and requires an actuary, but can shelter $200,000 or more annually in the right circumstances. Most useful for high-earning, older physicians who want to accelerate retirement savings.

The earlier you establish these accounts, the longer those assets grow tax-deferred. A retirement account set up in year one compounds for your entire career.

Guides: physician retirement planning and S-Corp 401(k) guide.

Move 8 — Plan for Quarterly Estimated Taxes

As an S-Corp owner, you pay taxes through two channels. Your W-2 salary is handled through payroll withholding — your payroll service takes care of that. But your share of S-Corp income (the profit that flows through to your personal return) requires quarterly estimated payments.

Quarterly due dates:

• April 15
• June 15
• September 15
• January 15 of the following year

The underpayment penalty kicks in if you pay less than 90% of your current year liability, or less than 100% of your prior year liability (110% if your prior year AGI exceeded $150,000). The prior year safe harbor is usually the safer target — but first-year physicians often have no prior year liability to reference. That means you’re estimating current year income from scratch.

New practices should work with their CPA to set payment amounts before the first quarterly due date arrives. A missed or underpaid estimated payment doesn’t just trigger a penalty — it creates a cash flow problem when the full balance comes due in April.

Move 9 — Build a Tax Calendar for Your First Year

A tax calendar keeps you from missing deadlines you can’t recover from. Here’s a practical timeline for the first year of practice:

The calendar above isn’t exhaustive. State deadlines, credentialing timelines, and payer enrollment all add complexity. But the tax deadlines above are the ones with real financial consequences if missed.

Frequently Asked Questions

Can I form my medical practice entity after I start seeing patients?

You can, but it creates problems. Income earned before your entity is formed is treated as personal income — no S-Corp treatment, no salary/distribution split. Any startup costs incurred after you start seeing patients may be classified as operating costs rather than startup costs, which changes their deductibility. Form the entity before you bill your first patient.

Do I need a CPA to start a medical practice?

You’re not legally required to hire one, but the decisions made in the first 90 days — entity type, S-Corp election, salary level, retirement account setup — have consequences that compound over your career. A CPA who specializes in physician practices will often save more than they cost in year one alone, and they’ll help you avoid mistakes that can’t be undone.

Should I buy or lease medical equipment for tax purposes?

Buying allows you to use Section 179 to fully expense the equipment in year one. Leasing converts the cost to an operating expense — deductible, but spread over the lease term. If you have the cash or access to financing at a reasonable rate, buying often produces better first-year tax results. If cash is tight, leasing preserves liquidity. Run both scenarios with your CPA before deciding.

Can I deduct my medical school loans in my first year of practice?

No. Repaying student loans isn’t a business deduction. You may be able to deduct student loan interest on your personal return (subject to income phase-outs), but the loan principal itself isn’t deductible. Physicians with substantial loan balances often benefit from income-driven repayment planning alongside their practice tax strategy.

What’s the biggest tax mistake new physicians make?

Missing the S-Corp election deadline. Filing Form 2553 late — or not at all — means operating as a disregarded entity for an entire year, paying FICA on every dollar of practice income rather than just the salary portion. For a physician earning $300,000 in net practice income, that can mean paying tens of thousands more in payroll taxes than an S-Corp owner at the same income level. The fix is simple: file Form 2553 within 75 days of formation.

Can a hospitalist with 1099 income benefit from S-Corp structure?

Yes. If you receive 1099 income as an independent contractor hospitalist, you’re subject to self-employment tax on 100% of that income. Forming an S-Corp and electing S-Corp treatment can reduce your FICA exposure by paying yourself a reasonable salary and taking the remainder as distributions. This strategy works best when annual net income exceeds roughly $80,000–$100,000, where the tax savings exceed the added cost of running payroll and filing a corporate return. Your CPA can model the breakeven point for your specific situation.

Get Your Practice Started Right

The first 90 days of a medical practice set the trajectory for years of tax planning. The moves above are not optional optimizations — they’re foundational decisions with hard deadlines and real financial consequences.

SDO CPA works with physicians at every stage, from entity formation and first-year tax planning to ongoing strategy as your practice grows. If you’re starting a practice or recently opened and aren’t sure where you stand, we can assess your structure and identify what still needs to be done.

Schedule a consultation to get your practice’s tax foundation in order.