Blog
Advanced Tax Strategies for Dentists
Introduction
As a dental practice owner, navigating your tax obligations is more important than ever. With the right tax strategies, you can significantly reduce your tax liability, which can greatly improve your profitability. In this blog post, we’ll explore some advanced tax strategies designed specifically for dentists, which can enhance the short and long term growth of your business.
1. Equipment Depreciation: Enhancing Your Practice
Your dental practice equipment is essential to delivering high-quality dental care. Section 179 is an effective tax strategy where you can claim depreciation as an expense. This means you can potentially deduct the entire cost of your qualifying purchases in the year they are purchased and used, offering a substantial tax benefit. Bonus depreciation allows a deduction of 80% of the asset price in 2023. These strategies can be used together to optimize deductions for your situation. However, depending on your income level, accelerating depreciation might not align with your long-term tax strategy, especially if you anticipate moving into higher tax brackets in the future.
2. Employing Family Members: A Dual Benefit
Incorporating your children into your dental practice serves a dual purpose: you can teach them work skills while also achieving tax savings. If you employ your children for legitimate roles (including hours actually worked in your dental practice), you can transfer income from your higher tax bracket to their lower one, effectively reducing your overall tax bill.
Dependents are allowed to earn significant tax-free income per year ($14,600 in 2024). This tax strategy promotes a work ethic in younger family members while offering a solid introduction to the profession. It’s important to adhere to the rules and structure these arrangements correctly to maximize both income and payroll tax benefits. Note that paying them from an S corp will not achieve the payroll tax benefit, so proper structuring will be needed to obtain both benefits.
3. Defined Benefit Pensions: Preparing For The Future
Defined benefit pensions are an effective retirement planning tool, because they allow for contributions that far exceed those permitted by more common plans like Simple IRAs and 401(k)s. By utilizing a defined benefit pension plan, you can make contributions 2-4 times more than what other retirement plans will allow.
For dentists looking to secure their future while minimizing current tax liabilities, defined benefit plans are a great tax strategy. They provide significant tax deductions today, and create a healthy income for your retirement. However, because of the complexities involved in setting up and managing a defined benefit pension, we recommend speaking with a dental CPA who can help you set this up in the most tax-effective way.
4. Captive Insurance: Customized Coverage & Tax Reduction
While insurance can be stressful, creating a captive insurance company can offer you a unique opportunity to insure your dental practice against specific risks while enjoying tax-deductible premium payments. For a long time, large corporations have benefited from IRS legislation that allows them to set up their own insurance company. By setting up your own insurance company as well, you can insure yourself in the same way, while accessing a tax benefit in doing so. This is a great way to create long-term financial protection and manage risk in your business. However, it’s worth noting that there are various regulatory and setup costs involved, so captive insurance works best for profitable dental practices.
5. Leveraged Donations: Philanthropy with Tax Benefits
Another great tax strategy is leveraged donations. There are many benefits to making a donation to a charitable cause. Making donations allows you to have a meaningful impact in society, while also receiving significant tax benefits. Leveraged donations is a tax strategy where you can donate high-value assets acquired at a lower cost. In doing so, you can achieve a philanthropic goal and enjoy a favorable tax deduction.
6. Research & Development (R&D) Credits: Rewarding Innovation
For dental practices engaged in research and development (for the purpose of advancing your dental care offering), the R&D tax credit offers a valuable incentive. This credit reduces your tax liability directly, which encourages you to make a continued investment in your dental practice innovation. Research and development can include various activities, such as developing new treatments, improving patient care processes, or testing materials.
7. Cost Segregation: Accelerating Depreciation
Cost segregation is an often-overlooked tax strategy that can lead to considerable tax deferral for dental practices with significant real estate investments. By reclassifying your property assets for tax purposes, you can accelerate depreciation deductions, reduce your taxable income, and enhance cash flow. You can do this by getting a cost segregation study done, which will help you identify the correct deductions to maximize your tax savings.
The cost segregation approach involves assigning components of real property from their conventional 39-year depreciation schedule to a more accelerated depreciation timeline. Through this method, assets can be depreciated over 5, 7, or 15 years, in contrast to the standard 27.5 or 39-year depreciation period associated with real estate. This strategy enables a quicker recovery of costs by shortening the depreciation period for certain components of a property, which reduces your income and related tax.
8. Navigating Pass-Through Entity Tax Rules
Recent state-level tax legislation allows you to circumvent the federal IRS limit on the deduction of state and local taxes (SALT), offering a significant tax-saving opportunity for dentists operating as pass-through entities. Each state has its own rules on electing and paying personal state taxes from your business entity to qualify for the federal deduction and state credit.
Conclusion
Implementing these specific tax strategies requires careful planning and execution, as there are various complex legal and financial considerations to be aware of. It’s important to work with a team of specialized dental CPAs who can assist with professional advice to help you avoid unintended tax consequences. By choosing the right combination of tax strategies tailored to your dental practice’s unique circumstances, you can legally secure substantial tax savings, and free up resources to invest in your business growth.
To find out more about implementing any of these tax-saving strategies, book a call with our team here at DrillDown Solution. We’ll help you optimize your dental practice’s financial health and set the stage for continued success and growth.
Check Out Our Other Popular Blogs
5 Keys to Putting Kids and Family Members on the Payroll
How Much Can a Small Business Make Before Paying Taxes
Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
