I accidentally discovered how wealthy doctors avoid paying taxes

I am an accountant who works for a company that does a lot of business and individual tax returns. We are based in the NYC area and have a lot of medical groups and pharmacies as clients. I do a lot of work for these clients and my bosses told me today that my work will be subsidizing their fees going forward. This means that I know a lot about these clients financial lives and I can actually look back at my previous work for them and notice patterns and red flags that I’m sure many CPAs would miss.<br><br>One of the things I noticed was how our firm was giving them huge deductions for “business use of your home” or “business use of your car”. Now I know that the average person who spends a few hours a week on their side hustle can only deduct a few hundred bucks here and there if they’re lucky, but these doctors were getting huge deductions for use of their second homes in the Hamptons (which they only use 2 weeks a year).<br><br>I decided to do a deep dive and realized that these doctors were forming S-corps and paying themselves a modest salary (which is subject to payroll tax) and then distributing the rest of the profits from their medical practice as “unearned income” (which is only subject to capital gains tax and avoids that pesky 15.3% payroll tax). Well, I guess it’s technically not their personal “unearned income” but rather the “unearned income” of the S-corp they formed and own 100%. The S-Corp then pays the “business use percentage” of the mortgage on their second home, the lease on their car, their malpractice insurance, their student loans, and their medical and disability insurance.<br><br>But wait, it gets better. The S-Corp doesn’t pay dividends to the doctors, it pays them as “shareholder loans”. Now the doctors have millions of dollars in their personal checking accounts that they can use to buy boats and condos, but if they ever get audited, the IRS has to prove that the S-Corp didn’t collateralize the loans (which would subject the loans to current taxes).<br><br>This is the holy grail of tax loopholes. By structuring everything correctly, these doctors avoid paying almost all income tax and have free reign to spend millions of dollars without the IRS breathing down their backs. The only downside is that they have to pay a bunch of money to a good CPA and tax attorney to set everything up, but that cost is negligible when you consider the tens of thousands of dollars in taxes that they’re saving each year.<br><br>And if the IRS ever audits them, they can just dissolve the S-corp and reform under a different name to avoid paying back taxes. It’s a tax loophole dream come true.<br><br>edit - Just to clarify that this is all completely legal or at the very least “gray area”. The IRS has very specific rules for what constitutes a legitimate business expense and there are very few loopholes to be exploited. This is something you should talk to a tax professional about, not something you should try on your own.