Dentists Should Make Tax Planning a New Year’s Resolution

At a glance:

• The main takeaway: Dental practitioners have a wide range of little-known options for lowering their tax bills, but they require significant planning ahead of time if you want to take full advantage.
• Impact on your business: Start tax planning as early as possible in 2024 to ensure you and your practice can leverage programs and provisions that could lower your tax bill significantly.
• Next steps: Consider the ideas and insights you gain from this piece, then schedule a consultation with Aprio’s Dental team to make them a reality.

Schedule a consultation with Aprio’s Dental specialists today.

The full story:

2023 is officially over, and with it goes 12 months’ worth of patient management, sales activities, supplier issues, insurance negotiations and staffing challenges. Your hard work and sacrifice have already paid off and will continue to pay off for you, your family and your legacy. But are you leaving money on the table?

It’s hard to make mental room for tax planning when you’re buried in work, which is often the case at the beginning of a new year. But there is a long list of provisions in the tax code that could potentially reduce your practice’s tax burden and help increase your family’s income — and to reap the full benefits, you need to act now.

Here are a few strategies that can help you start off your tax year on the right foot.

Write off equipment purchases with Section 179

Most equipment purchases are subject to standard depreciation rules that allow you to write them off over several years. This is fine for bigger businesses but can be disadvantageous to smaller practices. Section 179 of the US Internal Revenue Code was created to address this disparity.

Under Section 179, businesses are given the option to lower their current-year tax liabilities by taking an immediate deduction on expenses related to depreciable assets like equipment, vehicles and other material expenses that would otherwise be subject to standard depreciation. Small businesses often opt for a Section 179 deduction over the more traditional approach to capitalizing and depreciating applicable assets in order to access more immediate tax relief.

Any equipment that was purchased, in service and available to use by December 31 is eligible for the Section 179 deduction. It didn’t necessarily have to be in use by then, but it did have to be “plugged in” and ready to use before the new year to be eligible. The deduction itself also must fall under a certain dollar amount, which is currently set at $1,160,000 as of 2023.

Taking a Section 179 deduction can be lucrative in many situations, though it’s important to make sure the business case makes sense before purchasing the equipment in question. Section 179 is a tax deduction, not a tax credit, so it will only defray the cost of the equipment, leaving you holding the bill for the remaining cost. Make sure you actually need the equipment before making the purchase and have at least one conversation with your CPA about any potential purchases before money changes hands.

Benefits and bonuses

Some of your most impactful tax-saving opportunities may be found in the compensation, retirement and benefit packages you offer to your employees (and yourself). It all depends on your answers to a set of questions:

• Did you pay out bonuses at the end of the fiscal year or the start of the new year?
• Do you have a retirement plan in place for you and your employees?
• Are you satisfied with your current plan, or do you want something more robust?
• Have you instituted a profit-sharing system?
• Are you aware of the potential benefits you might realize if you did institute a profit-sharing system?

Many or all the considerations related to employee compensation may seem too expensive, unnecessary or undeserved at first blush — but the numbers may tell a different story. It might seem counterintuitive at first, but even the most expensive-sounding plans and benefits hold surprisingly lucrative potential.

Take retirement plans for example: If you already have a retirement plan in place for your practice, you should make sure to max out your contribution every year. If not, you’re missing out on both the immediate tax deduction for the year and the potential tax-deferred growth that the contribution might have realized — and that’s just the start.

Rules surrounding retirement plans require you to contribute to eligible employees’ accounts based on their own deferred contributions, their salaries and other metrics. We tell our clients that if they’ve maxed out their own retirement contributions, they’ll need to do the same for their employees. That may seem expensive, but the numbers usually work out in our clients’ favor.

Say you contribute $50,000 to your own account. You may have to fund about $10,000 across your other employees’ accounts for a total of $60,000. If you do this, you’ll simultaneously set yourself up to pocket $50,000 in the future and accrue a combined $60,000 tax deduction. The math shakes out to a seemingly expensive contribution that more than pays for the contributions you made to your employees’ accounts. The numbers can work out similarly with profit-sharing arrangements; the seemingly-expensive benefit can generate tax savings that more than pay for the program at the end of the day.

It’s natural to balk at the sticker prices of these benefits, which is why we recommend you seek the guidance of an experienced CPA to crunch the numbers and walk you through the calculations. After all, you may find a whole world of counterintuitive but ultimately profitable strategies that can benefit you and your employees.

Get creative

Many financial “experts” promise quick and clever ways to cut your tax bill as you start the new year — and many of their recommendations may sound too good to be true. While you are right to be wary of unsolicited financial advice, it is technically accurate that there are several obscure tax strategies that can help you save more money; but it is important to remember that any tax strategy can backfire if you don’t enlist the help of a qualified CPA and adhere closely to applicable IRS rules.

Take the topic of familial compensation for example: If a colleague or peer told you they put their dependent children and significant other on their payroll and advised you to do the same, there’s a good chance you’d react with skepticism, at best. Contrary to what you may think or feel, employing family members in your practice can be a profitable tax strategy, but only if you execute it in a compliant manner.

Provisions in the tax code and precedent set by court cases state that business owners may legally put their children over the age of 6 on their payroll. Children can legally earn up to $13,850 (federally) per year tax-free, which offers the dual benefit of additional tax-free income for your family as well as the deduction your practice receives for their wages.

The one catch is that you can’t just pay your children to sit in the waiting room for $1,000 an hour; they actually have to do jobs they can be reasonably expected to perform at wages comparable to the market rates for employees doing similar work. In other words, you can’t hire your kids to do dental cleanings, but you can pay them entry-level wages to clean the office or do data entry.

If your partner or spouse isn’t employed elsewhere, you may want to consider putting them on your payroll as well. Not only will the wages you pay them augment your family’s overall income, but having them in your employ will give them access to the retirement plan and benefits you offer other employees. We advise clients to pay their significant others just enough to maximize their retirement contributions, though their actual pay rate should obviously depend on their qualifications and what they do for your practice.

Finally, if you bought or constructed a building in 2023 worth at least $500,000, we recommend you schedule a consultation regarding a potential cost segregation study. Depending on the results, you may be able to significantly accelerate your property’s depreciation, letting you take a much larger and more immediate tax deduction than without the study.

The bottom line

Don’t leave money on the table — and remember that this is not a complete list of all the potentially lucrative strategies you could employ to reduce your tax bill. There are many more tax-saving strategies available to savvy practitioners who work closely with qualified CPAs, but the options above should give you a sense of where to start your search for strategies and deductions that can help put you in the best tax position possible.

Schedule a consultation with Aprio’s Dental team today to see what other options are available to help make 2024 the best tax year yet.

Related Resources:

6 Dental Insights from Q4 2023 and What They Mean for You

Are You Ready to Hire a Dental Associate? 6 Metrics to Consider

4 Steps to Prepare Your Dental Practice for the Unexpected