Mitigating Tax Risks For Dental Practice Owners

Tax mitigation is essential as a dental practice owner.

With increased funding to the IRS, your chances of being audited are increasing, especially if you have $400,000 or more in total annual income. At the same time, taxes are also going up. 

Starting in 2022, research and development (R&D) expenses previously allowed as deductible items must now be capitalized and amortized over five years. 

Last year (2022) was the final year of the 100% bonus depreciation allowance through the Trump era tax cuts, with decreasing impact over the next 5 years. In 2026, the top tier individual income tax rate will increase from 37% to 39.6%. President Biden has also proposed additional tax increases.

With increased audit and enforcement pressure as well as overall tax increases, proactive tax planning strategies are essential. You need to know how much to budget for taxes as well as your options for tax mitigation strategies, to align with current tax law and IRS regulations.

In this blog post, we’ll explore how to identify tax risks and mitigate them, by understanding and implementing an effective tax planning strategy.

Understanding Tax Risks

Tax risk is the potential risk that businesses face in paying an incorrect amount of tax (either too much or too little). This can be due to changes in the IRS tax code or tax rules, incorrect classification of expenses, complex transactions, or inadequate bookkeeping.

It’s important to analyze your tax risks and relevant tax legislation updates because both of these can contribute to higher losses than expected. This can have a negative impact on your cash flow and retained earnings, which affects your entire business.

Common types of tax risks that dental practices face include:

• • Changing tax legislation – the IRS and government are constantly updating tax rules which document the allowable tax deductions
  • IRS audit risk – the IRS has recently received additional funding to increase the number of audits across businesses, so your risk of being audited is higher
  • Missed opportunities – due to delayed tax filings

• Inaccurate bookkeeping and financial data

• • Misinterpretation of tax law

• Missed tax reduction opportunities

If these tax risks are not managed effectively, you may face potential consequences including IRS penalties, additional taxes, and financial strain, all of which can lead to further issues in your dental practice.

Identifying & Evaluating Tax Risks

Identifying and evaluating tax risks is a complex task because of the number of tax changes that arise every year. By working with a Dental CPA firm, you can be proactive in identifying tax risks and put a plan in place to mitigate them. A Dental CPA firm is up to date on industry tax changes, allowable deductions, and the best ways to implement your tax strategy.

You can use various tools to identify tax risks in your dental practice. These include tax risk assessments, quarterly financial reviews, and periodic tax planning. Most dental practice owners don’t review their tax position as regularly as they should.

Common areas where tax risks may arise include:

Dental practice transitions – Purchasing or selling a dental practice are complex transactions which are treated differently than regular business income. Price allocation, depreciation, optional tax elections, and installment sales require expert attention. 

Incorrect entity structuring – We still see dentists in proprietorships that result in overpayment of taxes.

Commingling business and personal expenses – The IRS has been known to strip away corporate protections when a business does not segregate these areas. 

Being unaware of lesser known tax strategies available to dental practices, including tools like R&D credits, cost segregation of real estate, depreciation methods, captive insurance and other advanced strategies. For example, taking immediate tax deductions for equipment may not be in your best long-term interest.

Inaccurate bookkeeping – by managing your bookkeeping in-house or by yourself, you are exposed to tax risk if transactions are incorrectly categorized. By having a Dental CPA firm manage it for you, your tax risk is minimized and they can identify additional allowable deductions to reduce unnecessary taxes.

ERC compliance – there are many third parties offering Employee Retention Credit (ERC) schemes that charge large upfront fees to business owners. However, these promoters often don’t inform tax payers that wage deductions claimed on the business’ federal tax return must be reduced by the amount of the credit. The IRS is actively auditing businesses in this area and you may face tax penalties for ineligible claims or not amending prior year returns.

It’s important to review and assess the likelihood and potential impact of identified tax risks. This is where a tax risk assessment is effective. By analyzing your tax risks, you can create a strategy to reduce the likelihood of them occurring. We recommend partnering with a Dental CPA firm to ensure your tax mitigation strategy is effective, as they can identify areas and recommend tax strategies relevant to your dental practice. 

Mitigating Tax Risks

Now that you’ve identified and evaluated your tax risks, the next step is to develop an effective plan to mitigate any tax risk exposure in your dental practice.

The first step is to establish tax risk management processes and controls. You can do this by allocating certain tasks to internal staff members, or to an external Dental CPA accounting firm.

Internal audit and monitoring procedures play a vital role in mitigating tax risks. Regular reviews of financial records, tax returns, and compliance procedures ensure that any potential issues are identified and addressed promptly. It also reduces the risk of any fraudulent transactions occurring in your dental practice.

Effective tax planning is another key aspect of mitigating tax risks. By implementing proactive tax planning strategies, dental practice owners can take advantage of tax incentives and credits to minimize tax liabilities. By regularly reviewing your tax planning strategy, you can ensure that your tax planning aligns with the changing IRS tax landscape and continues to optimize tax savings for your dental practice. 

Conclusion

Mitigating tax risks is a critical component of running a successful dental practice. With the increasing audit and enforcement pressure, as well as overall tax increases, proactive tax planning strategies and risk management are more important than ever. By understanding tax risks, identifying them early on, evaluating their potential impact, and implementing effective tax strategies, you can safeguard your businesses and minimize your tax liability.

To find out more, book a free consultation with us today and let our team of experts guide you through setting up an effective tax planning strategy.