With most dentists earning high incomes, regularly purchasing equipment, and generating business deductions through their practices, their tax liability can be impacted heavily. Because practices are classified under federal tax rules as specified service trades or businesses, certain benefits and deductions are phased out as their income increases.
As a result of these unique tax circumstances, if a tax reduction for dentists and proper tax planning is to be effective, it should involve the coordination of practice revenue, personal income, equipment purchases and retirement contributions throughout the year, instead of these being addressed separately when it’s time to file.
Here are a few important aspects of effective tax planning for dentists:
Entity structure selection
Determining how income is taxed, the availability of deductions, and how payroll taxes are applied, how a practice is classified in terms of taxes can make a huge difference when it’s tax time.
A lot of dentists begin their careers as sole proprietors, before transitioning to an LLC taxed as an S-Corporation as the practice grows. While the former is a simple structure, it can increase the tax burden overall. The latter is often favored for helping dentists with established practices, reduce their overall tax liability.
In some instances, a C-Corporation election might be advantageous for those practices planning for long-term growth or certain exit strategies; double taxation and dividend rules must be carefully considered, however.
It’s also not uncommon for dentists to hold their practice in a separate LLC, as real estate. The real estate entity then leases office space to the dental practice, which can create extra deductions while providing asset protection.
Retirement planning
For dentists planning their taxes, this plays a very important role as retirement contributions can help dentists build up their long-term savings, while also reducing their taxable income.
Here are some common retirement plans used by dentists:
- SEP IRA
- 401 (k)
- Solo 401 (k)
- Pension
Equipment deductions and depreciation
From dental chairs and scanners to imaging systems and surgical instruments, dental practices typically make regular investments in costly equipment that when timed right through depreciation rules, can give them access to worthy tax deductions.
Section 179 deductions and bonus depreciation are two of the most important dental tax-planning tools. Section 179 allows dental practices to expense the cost of equipment purchases immediately, rather than depreciating it over a number of years. Bonus depreciation allows dental practices to deduct a portion of equipment costs in the same year that they were bought.
If a dentist expects to receive a particularly high income in a given year, it may be able to increase deductions and lower taxable income by accelerating purchases of equipment before the end of the year.
Income and deduction optimization
The Qualified Business Income deduction, or QBI, allows the deduction of up to 20% of qualified business income for eligible business owners. But for dental practices, the deduction is phased out at higher levels of income. To find the right strategy that will leave you eligible for the deduction as a dentist, consult with a dental tax expert.
Pass-through entity tax election may also allow certain dental practices to pay state income taxes at the entity level instead of on the personal return of the owner. But again, expert guidance is needed.
Ultimately, managing deductions and income thresholds as a dental practice owner, requires meticulous planning and experienced guidance from experts in tax planning for dentists in Fort Lauderdale.
If you’re a dentist who doesn’t take a proactive approach to your taxes, you could be missing out on significant deductions that may have a negative impact on your long-term wealth. But by coordinating business structure, income timing, retirement contributions and equipment deductions, you can reduce your tax exposure while staying on track with your broader financial goals.