7 Things to Know Before You Start a New Functional Medicine Practice

Starting a functional medicine practice is exciting, but the tax side can trip you up if you’re not prepared. Unlike conventional practices, functional medicine often involves more cash payments, supplements, and unique service structures, which affect your taxes. Here are 7 things you need to know before you open your doors, so you can avoid surprises and keep more of what you earn.

1. Choose the Right Business Entity for Tax Purposes

Your business structure determines how you pay taxes and your liability. Most functional medicine practitioners start as a sole proprietorship or single-member LLC, but that may not be optimal.

• Sole Proprietorship/LLC (single-member): Simple, but you’ll pay self-employment tax (15.3%) on all net income. You can deduct business losses, but you’re personally liable.
• S-Corporation: If you expect net income above $60,000 to $80,000, an S-corp can save you self-employment tax. You pay yourself a reasonable salary (subject to payroll taxes) and take the rest as distributions, which are not subject to self-employment tax. Setup and payroll costs run $1,000 to $2,500 initially, plus $100 to $300 per month for payroll services.
• Partnership (if you have a partner): You’ll file a partnership return, and each partner pays taxes on their share.

Action step: Consult a CPA who works with healthcare practices. They can run the numbers for your projected income and help you decide. Don’t wait until tax season.

2. Understand How You’ll Be Taxed on Patient Payments

Functional medicine often involves cash payments, membership fees, and supplement sales. These are all taxable income, but the timing matters.

• Cash payments: Report as income when you receive them, even if you haven’t billed insurance.
• Membership fees: If you charge monthly or annual fees, you may need to recognize the income over the service period. For example, a $1,200 annual membership might be recognized as $100 per month.
• Supplement sales: If you sell supplements, you’ll need to track inventory and cost of goods sold. You can deduct the cost of the supplements you sell, but you must track it properly.

Action step: Set up a separate business bank account and use accounting software like QuickBooks or Xero. Track every payment and expense from day one.

3. Know Your Deductions: What You Can and Can’t Write Off

Functional medicine practices have unique deductions. Here are the big ones:

• Office rent and utilities: If you have a physical office, deduct rent, utilities, and internet.
• Medical equipment and supplies: Exam tables, diagnostic tools, and lab supplies are deductible. Equipment over $2,500 may need to be depreciated, but Section 179 allows you to deduct the full cost in the year you buy it (up to limits).
• Supplements and inventory: Cost of goods sold is deductible, but you must track inventory.
• Continuing education: Courses, conferences, and certifications are deductible, including travel if it’s primarily for business.
• Malpractice insurance: Fully deductible.
• Home office: If you have a dedicated space used exclusively for business, you can deduct a portion of rent/mortgage, utilities, and internet. The simplified method gives $5 per square foot, up to 300 square feet.

Don’t deduct: Personal meals, commuting to your office, or entertainment.

Action step: Keep receipts for all business expenses. Use a separate credit card for business to make tracking easier.

4. Plan for Self-Employment Taxes

If you’re a sole proprietor or LLC owner, you pay self-employment tax (Social Security and Medicare) of 15.3% on your net income. This is in addition to income tax. For 2026, the Social Security wage base is $176,100, so the 12.4% Social Security portion applies up to that amount, and the 2.9% Medicare portion applies to all net earnings.

Example: If your net income is $100,000, you’ll owe about $15,300 in self-employment tax, plus federal income tax.

Action step: Set aside 25% to 30% of your income for taxes. Make estimated quarterly payments to avoid penalties. Use Form 1040-ES to calculate.

5. Sales Tax on Supplements and Products

Most states require you to collect sales tax on tangible goods, including supplements. Some states exempt certain medical products, but functional medicine supplements are often taxable. Rates range from 0% to 10% depending on your state and local jurisdiction.

• Check your state’s rules: For example, California charges 7.25% base, but local taxes can push it higher. Texas charges 6.25%.
• Services: Functional medicine consultations are generally not subject to sales tax, but if you sell supplements, you must collect tax on those.

Action step: Register for a sales tax permit in your state. Use a system like TaxJar or Avalara to automate sales tax calculation and filing.

6. Track Your Mileage and Travel

If you travel to see patients, attend conferences, or visit other clinics, you can deduct mileage and travel expenses. The IRS mileage rate for 2026 is 67 cents per mile (estimated, but it’s typically around 65-70 cents).

• Mileage: Deduct business miles driven for work, not commuting. Keep a log with date, purpose, and miles.
• Travel: Flights, hotels, and meals (50% deductible) for business trips are deductible.

Action step: Use a mileage tracking app like MileIQ or Everlance. Log every trip from day one.

7. Work with a Tax Professional Who Knows Healthcare

Tax laws for healthcare practices are complex, and functional medicine has additional nuances like supplement sales and membership models. A general CPA might miss deductions or make errors.

• Cost: A CPA who specializes in small healthcare practices typically charges $300 to $800 for a business tax return, and $150 to $300 per hour for consultations.
• What to look for: Experience with S-corps, inventory tracking, and healthcare-specific deductions.

Action step: Interview 2 to 3 CPAs before you launch. Ask about their experience with functional medicine or similar practices. Get a fee quote in writing.

FAQ

Q: When should I start paying estimated taxes? A: You should make estimated tax payments quarterly if you expect to owe more than $1,000 in taxes. For a new practice, start in the first year, even if you have losses. Your CPA can help you calculate.

Q: Can I deduct the cost of starting my practice? A: Yes, startup costs up to $5,000 are deductible in the first year, but the deduction is reduced if your startup costs exceed $50,000. The rest is amortized over 180 months. Keep records of all pre-opening expenses.

Q: What if I sell supplements online? A: You may have sales tax obligations in multiple states if you sell online. Use a platform like Shopify or Square that calculates sales tax, and consider using a service like TaxJar to handle multi-state compliance.

Q: How long do I need to keep tax records? A: Keep all tax records for at least 7 years. This includes receipts, bank statements, and tax returns. If you have assets like equipment, keep records until the asset is fully depreciated.

Related guides

• 7 Mistakes New Functional Medicine Practices Make in Their First Year
• 7 Questions to Ask Before Buying a New Functional Medicine Practice
• Best New Functional Medicine Practice Tools Compared in 2026

The bottom line

Starting a functional medicine practice is a big step, and taxes are a critical part of the business. Choose your entity wisely, track every expense, plan for self-employment tax, and get professional help. By taking these 7 steps, you’ll avoid costly mistakes and set your practice up for financial success. Don’t wait until tax season; start now.