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12 January, 2023

7 Ways for Dental Practices to Reduce Their Tax Burden

If you’re like many other dental practice owners, you probably don’t have a huge profit margin. Most likely, you’re just getting by as you attempt to limit your equipment expenditures and contain your payroll costs, while providing exceptional oral health care for your patients. 

In the meantime, it seems that taxes become an ever-increasing burden to your small business more and more every year. That is why it is in your best interest to reduce your tax liability as much as possible. 

There is no doubt that navigating the nuances of tax laws and regulations is a complex task. So, how do you go about decreasing your tax burden so you can dedicate more of your time and attention toward growing your business? 

In this blog space, we will present seven ways that you can reduce your tax burden and share tips and strategies for saving money with your taxes.

1)   Select the Right Corporate Structure 

It is essential to select the appropriate business structure for your dental practice when it comes to potential tax advantages.  Typically, an S Corp will reward you with a lower tax burden. The reason for this is that it is not subject to double taxation. 

Also, you’re able to deduct losses from the S Corp directly against your personal income. If you register under a S Corp, you could also shield a portion of your business income from taxation by splitting it between family members via stock sales, gifts, and other strategies.

2)    Make Contributions to a Registered Education Savings Plan 

By making contributions to a Registered Education Savings Plan (RESP), it will give you a tax efficient way to save and pay for your children’s post-secondary education. The Federal Government offers a gift/grant that is equal to 20 percent of the initial $2,500 of yearly RESP contributions per child or $500 annually. 

3)  Make Contributions to a Retirement Plan 

Does your dental practice have a retirement plan?  One of the best ways to decrease your taxes is to maximize your retirement fund contributions. 

Here are couple types of retirement plans to consider: 

  • SIMPLE Plan – A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. 
  • A Cash Balance Plan – A cash balance plan can offer a valuable strategy to jump-start your retirement savings or catch up if you are behind.

Consider which retirement plan is most relevant for your dental practice. You’ll want to make sure it is the right retirement plan at the right time in the evolution of your small business.

Benefits of contributing to a retirement plan are the following: 

  • Saving Taxes – If you contribute a substantial sum to a specific retirement plan every year, your dental practice could possibly save as much as 40 percent in tax on that specific contribution. You can then put these saved funds into your staff development instead of paying it to the IRS, for example.
  • Positioning Yourself for Retirement – Begin to set aside money for your retirement as soon as possible. By doing so, your retirement fund will begin to grow and compound. The goal is to position yourself favorably for retirement.  You will be able to do so if you project the year of your retirement as far into the future as you can.

   4)  Take Advantage of Charitable Contributions 

If your goal is to maximize tax deductions – and lessen your tax burden – then making charitable contributions is an ideal way to do that. However, there are new tax laws in place that have significantly changed how to make charity contributions. 

For example, think about the effect of the new increased standard deduction. It is now double what it was in previous years. Also, if your charitable contributions total less than the standard deduction in a given year, you will not receive a tax deduction on these contributions. 

In order to donate to a charity organization and receive a tax benefit, you’ll want to forecast the next several years of charitable contributions. For example, with a donor-advised fund, you will receive a tax deduction in the year that you fund it. 

So, if you were looking to contribute $80,000 to charity in the next several years, you could take the deduction in the first year of funding the donor-advised fund. This fund would basically become a checking account for making future donations over these next four years. You would then take the standard deduction in the subsequent years. 

5)  Employ Your Family 

Employing a member of your family is another effective way of reducing your tax liability. In order to do this, your family member needs to perform ordinary and necessary work for your dental practice. Keep in mind that the amount of wages that your family member earns needs to be reasonable for the work that was done. 

If you employ a family member with your small business, then you can receive the standard deduction, as long as it’s through your company’s payroll, and it is a legitimate deduction. Your family member will then not have to pay income tax on that income based on the standard deduction covering it. 

The sole cost to your dental practice will be the payroll taxes on those wages. 

6)  Open Up 529 Plans 

You may have kids in your family who are too young to work. If that’s the case, they can still help you save money on your taxes. Just open up a 529 plan for each child. The 529 plan is a special tax-deductible investment account that enables you to save money on taxes, while also saving for future education expenses. 

The specifics of how 529 plans work differ from state to state. However, they have extremely high contribution limits. This means you could benefit from huge tax breaks depending on the income taxes and regulations in your area and state. 

7)  Open a Medical Expense Reimbursement Plan 

A Medical Expense Reimbursement Plan (MERP) is an excellent way to decrease your tax liability. The MERP does not pertain to sole proprietors. But for other types of corporate structures, the MERP allows dental practice owners to reimburse themselves and/or their employees for 100 percent of out-of-pocket medical expenses, and tax free. If done correctly, you will be able to pay all your medical expenses with pre-tax dollars. 

MERPs are also available with group health insurance. They are especially popular with HDHP (High Deductible Health Plan) insurance plans, because they normally have higher out-of-pocket costs. A primary benefit of selecting an HDHP plan is that it enables you to open an HSA (Health Savings Account), that you can put more money into tax-free. 

Don’t Overlook These Tax Deductions 

Small business owners significantly overpay on their taxes every year because they don’t take full advantage of all the deductions, income adjustments, and credits that they’re entitled to. 

Here are some of the most common deductions that business owners tend to overlook. You will want to consult with a tax accountant to determine which of these deductions would apply to your dental practice. 

1)     Costs of Job-hunting —Maybe you’re searching for a new associateship or moving to a new practice. The costs associated with these activities might include air travel, signing up with an employment agency, resume preparation, and printing costs. You could realize some tax deductions here, but only if your total miscellaneous itemized expenses surpass 2 percent of your adjusted gross income. 

2)     Out-of-Pocket Charitable Expenses —You could very possibly overlook the expenses involved in making charitable contributions. For example, the limit for charitable contributions is now 60 percent of adjusted gross income. Meals, lodging, sponsoring sports teams, and travel can all be counted as tax deductions, as long as they are related to volunteer work. 

3)     Refinance Points for a Mortgage — When you purchase a home, you are able to deduct the total points that were paid to secure your mortgage. Similarly, when you refinance your home, you can deduct the points, but there is a caveat. Refinancing points have to be deducted over the life of the loan. When you pay off or sell your loan, you can deduct the points not yet deducted – unless you refinance with the same lender. 

4)     Lifetime Learning Credit — Are you considering undergoing some professional development to sharpen your ownership skills? This credit is available to you if you are taking college classes, regardless of whether it is for a degree or not. This will provide you with a 20 percent credit on tuition expenses, with a maximum of $2,000 on the first $10,000. You’ll be able to claim this credit on your tax return if you, your spouse, or your dependents, are enrolled at an eligible institution and you were responsible for paying college expenses. 

Look to Drilldown Solution for Expert Tax Planning Services for Your Dental Practice 

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on the needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring that your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business. 

Our Provo, Utah Tax Planning Services are just what your small business needs.

 

Adam

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