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Income Guarantee Contract - When to Pay Taxes?

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  • Income Guarantee Contract - When to Pay Taxes?

    Hello all,

    I am just getting started in practice. My contract is an "Income Guarantee" via a third party hospital, provided over 12 months and then the loan is forgiven over the subsequent 36 months. As the loan is forgiven, my understanding is that generates a tax.

    In speaking with my CPA, they mentioned they see many of these contracts and typically recommend to just pay the tax on the loan immediately (as in within the first 12 months) to prevent additional tax burden in the subsequent years (as income grows).

    Does this seem reasonable? Would there be a possibility of being taxed twice?

  • #2
    It sounds like this recommendation was given under the assumption that the tax rate on the forgiveness of the income advance is higher in years 2 and 3 than in year 1 when you're just starting and your income is lower.

    This is actually trickier than it sounds and to get the right answer you'd need to run a full 3-4 year scenario with the paying the taxes on the advance in year 1 and then in year 3 or 4 (Since you're starting mid-tax year I'm saying 3 or 4 to mean tax year 3 or 4).

    As far as being taxed twice, technically you can't just choose to include the advance in income if it's really a loan. The terms of the arrangement should govern the taxation. Either it's a loan or it's income.

    If the math says that it's more tax advantageous to recognize the payment as income in year 1 rather than year 3 or 4, then I'd have the actual agreement say that it's income rather than a loan that will get forgiven later.