AUTHOR: The Dental CFO
December 12, 2023
As the year draws to a close, dental practice owners face a critical juncture to ensure their financial well-being. Effective tax planning not only safeguards your practice's financial health but also sets the stage for a prosperous new year.
This blog serves as a comprehensive guide tailored specifically for dental practice owners, offering expert insights and strategic tips to navigate the complexities of year-end tax planning.
From maximizing deductions to optimizing retirement contributions, this guide aims to equip you with the knowledge and tools necessary to make informed financial decisions and secure a stronger financial future for your dental practice.
Considerations for Year-End Tax Planning
Dental practice owners should take action on the following points and consider discussing these aspects with their tax advisors for comprehensive tax planning.
Dental practices require a great deal of equipment — not just for front and back office operations, but in providing care to patients. As dental technology continues to improve, you may be considering if it’s time to purchase new equipment or if you should wait until 2024.
If you’ve already purchased equipment this year, you need to have records of when you purchased it as well as when you placed it into service. For most small pieces of equipment, they are often the same day, but for larger equipment or because of supply chain issues, the dates may differ.
You then need to choose whether to depreciate the equipment over time or expense the entire amount this tax year under Section 179.
Your purchases may also qualify for bonus depreciation, an additional first-year depreciation deduction. This percentage amount, and if it’s offered, does vary by tax year. For the 2023 tax year, businesses can write off 80% of the acquisition cost, spreading the remaining 20% value across subsequent years.
Whether you have an urgent need to replace broken or obsolete equipment or you’re just considering an upgrade and your need isn’t immediate, your tax advisor can help you determine the tax implications of purchasing now or waiting until the next tax year.
Office Building Updates
Many dental practices took advantage of the reduction in foot traffic from patients and staff during COVID-19 to change or update their dental facilities. If you simply relocated to a different rented practice space, you can deduct your moving expenses for your supplies, equipment, fixtures, and other business equipment and continue to deduct rent as usual.
But if you did a full-scale renovation, bought an office building, or had a building constructed to your specifications, you would need to depreciate the building and also consider having a cost segregation study performed.
Having a cost segregation study done helps taxpayers delineate which aspects of the building’s purchase or construction are real property, personal property, and land improvements and how those items are subsequently treated on your tax return.
Unlike Section 179 for equipment purchases, there’s no immediate shortcut where you can expense the significant investments made in personal and business real property and improvements. For tax law purposes, real property includes things like fixtures that don’t directly affect the building’s maintenance and operations and have a much shorter depreciation period.
While it’s more beneficial to have a cost segregation study done as soon as you renovate, purchase, or construct a new building, you can also have this study performed on buildings purchased in prior years.
The 2018 tax reform provided benefits to expedite cost segregation studies, allowing taxpayers' bonus depreciation deductions to encourage the purchase and construction of business real estate.
If construction or renovations are still underway, you won’t get a depreciation deduction until the building is complete and in use.
Health Savings Accounts
Health savings accounts (HSAs) are robust tax-saving tools that frequently get overlooked. They function very similarly to Roth IRAs in that you can make tax-free withdrawals if you have eligible medical expenses and the funds will grow tax-free, although you can take a deduction on your personal tax return for the contributions.
If you’re enrolled in a high-deductible health plan, you can open a health savings account and contribute. For 2023, individuals can contribute up to $3,850 and families up to $7,750, with an extra $1,000 catch-up contribution if they are 55 or older by the end of the tax year.
One of the key benefits of an HSA is that other people can contribute to it, provided that your total annual contributions fall under the prescribed limits. Employers can contribute to employees’ health savings accounts; so if your dental practice operates as a C corporation, you can deduct your contributions at the business level rather than the personal level.
Many people use health savings accounts as a supplement to traditional retirement savings plans like IRAs and 401(k) plans since you can withdraw HSA funds for non-qualified expenses after age 65, but they are still subject to regular income tax. What it avoids is any penalties associated with distributing dollars for non-medical expenses.
Choosing the Right Retirement Plan
If you have not yet contributed to retirement plans for the year, whether they are personal IRAs or plans established in your dental practice’s name, now would be a good time to do so to maximize contributions.
The contribution limit depends on the type of plan and your age. The right plan for you depends on both business and personal finances and future financial plans on both fronts. As a small business owner, you have more robust savings options available, including:
- Simplified Employee Pension (SEP)
- 401(k) plan
- Cash balance plan
- Profit-sharing plans
When properly funded and planned, you can set aside between $100k to $200k for the tax year, depending on your age and annual income.
If you are in the process of setting up an employee retirement plan for your dental practice, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 provides a tax credit to eligible small business employers to help offset the cost.
Standard & Itemized Deductions
When the 2018 tax reform was enacted, it significantly reduced the number of taxpayers who itemized on their tax returns due to the $10,000 State and Local Tax (SALT) cap that combined real estate taxes with state and local income taxes. With this cap, it became more advantageous for some taxpayers to take the larger standard deduction.
With tax deductions for mortgage interest, real estate taxes, other state and local taxes, and charitable contributions effectively reduced or even eliminated for many taxpayers, more take the standard deduction now.
The benefits of the standard or itemized deduction ultimately depend on whether it makes sense for your filing status and deductions. Depending on where you live, you may also take the itemized deduction at the federal level even if it’s lower than the standard deduction because you would gain more benefits under state tax laws.
If you made significant charitable contributions to eligible organizations (typically those with 501(c)(3) designation that can be found in the IRS’ tax-exempt organization search), you will need to consider whether it’s worth it to itemize. There is an annual deduction limit of 30% of AGI (non-cash) contributions and 60% of AGI (cash) contributions.
If there are multiple causes you like to support, and you aren’t sure how to maximize your tax benefits, donor-advised funds are an option to consider. A brokerage account is created where you can pool a large sum of money, get a full tax write-off in that calendar year, let your funds grow tax-free, and then distribute funds to selected organizations in future years.
Often, an effective tax strategy is to alternate between standard and itemized deductions. If you took a standard deduction last year, look for opportunities to maximize itemized deductions in this tax year.
College Savings Plans
Do you have children already in or heading to college? This is a large expense with tax advantages.
529 plans are a popular college savings option because qualified withdrawals don’t incur income taxes and, unlike a 401(k) plan, most states don’t tax them while the contributions are deductible.
However, some states, like North Carolina, won’t allow you to deduct these contributions. Other states, like South Carolina, allow up to 100% of 529 plan contributions to be deducted at the state level.
529 plan withdrawals are typically considered qualified when tuition, books, and supplies must be paid for, but it can get confusing as to what is and isn’t qualified when college expenses continue to mount. However, since the late 2017 tax overhaul, 529 plans can be used to pay up to $10,000 per year for private, primary, and secondary education tuition.
Keep records of any tuition assistance your children receive, such as Pell grants, scholarships, veterans’ educational benefits, gifts, and other tax-free education assistance. These amounts can affect the taxability of 529 plan withdrawals.
Getting a Company Car
Most small business owners in the United States rely on vehicles for carrying out their day-to-day work, and dental practices are no exception.
There are numerous tax benefits in buying a dedicated company car compared to using your personal vehicle for business. In addition to being able to fully expense car maintenance costs, you can even depreciate all or most of the car’s purchase price. You can learn more about tax implications for company cars in our free guide.
“Master’s Rule” for Renting Your Home or Vacation Property to Your Own Business
If you haven’t conducted business at your home or rental property by holding staff meetings, company retreats, holiday parties, or other events, perhaps you should consider it over renting a hotel or a similar facility.
A little-known tax benefit is that if a dental practice rents a home from its owner for business purposes — as in the practice pays rent to you personally — you don’t need to pay taxes on the rent, provided that the stay is for 14 days or less. And the practice still gets a deduction for rent paid.
Tax Benefits For Hiring Family in Your Dental Practice
Since family businesses were originally the cornerstone of the American economy, numerous provisions in the tax code still provide benefits to hiring your spouse and children in your small business.
The jobs created don’t need to be in a dental capacity. They can be in support functions, like admin, payroll, marketing, maintenance, and janitorial. You just need to set them up on a W-2 or 1099.
If any of your children are under 18, and your dental practice operates as a sole proprietorship or is otherwise unincorporated, neither your child nor your business will have to pay Federal Insurance Contributions Act (FICA) taxes on their pay.
Regardless of your child’s age, income paid to your children is not only taxed at a lower bracket than yours (since they likely have little or no other income to report), but it’s also an expense for you as a business owner and helps reduce the amount you pay in taxes.
Additionally, you can start the clock on your children’s retirement early by setting up and encouraging them to contribute a percentage of their income. There aren’t any tax benefits for you in doing this, but it’s a great start for your children’s retirement fund.
Hiring your spouse may boost your household income while reducing your business tax liabilities. Also, as your employee, your spouse may be able to participate in many of the same tax-advantaged benefit plans, like medical expense reimbursement plans.
If your spouse is a co-owner of the business and it’s not incorporated, you may be able to use qualified joint venture status and essentially be treated as a singular taxpayer, thus significantly reducing self-employment taxes owed.
Your spouse can also use earnings to contribute to a retirement plan and get work credit for Social Security purposes, which will benefit you both as you approach retirement and start drawing from Social Security benefits.
Offsetting Capital Gain Income
Capital gains and losses can be utilized as tax savings tools in many different ways.
With the market fluctuations that took place throughout the past few years, many taxpayers took advantage of “loss harvesting” by properly timing poorly performing stock sales at a loss with realized gains from well-performing stocks to reduce or even negate taxes on capital gains.
Deferral is another strategy to consider. If you have a significant amount of money in a brokerage account and anticipate a large capital gains tax, you can defer it by rolling your gains into what’s called a qualified opportunity zone investment.
While this method takes more legwork than loss harvesting, opportunity zone investments are funds that focus on development in economically distressed areas.
This designation is made by states, U.S. territories, and the District of Columbia nominating their areas and receiving certification by the U.S. Treasury. The Secretary of the Treasury decides, based on census data and other information provided by these localities, whether to certify that this area is a qualified opportunity zone.
You do not need to live in the zones designated by the Treasury to contribute or benefit. All you need to do is reinvest your capital gain income into an eligible qualified opportunity fund.
Continuing education is often a requirement to maintain licensure and stay in good standing with professional associations. Any continuing education expenses for yourself or your employees are deductible, and you should make your continuing education arrangements before the year ends to take the deduction in this tax year.
If you paid for any continuing education with personal funds, make sure you reimburse yourself from your own practice before year-end.
After COVID-19 ravaged the restaurant industry, the business meal deduction for meals prepared by a restaurant was expanded to 100% for 2021 and 2022. Food purchased at grocery or convenience stores was subject to the usual 50% limit.
As of January 1, 2023, however, all business meals are 50% deductible and you can claim this deduction for professional catering, meals out, and meals eaten while on business travel.
Working at Home
As working from home became a necessity for millions of people during the pandemic, turning part of your home into an office can equate to numerous tax benefits. A portion of your rent or mortgage, plus property taxes, utilities, and other home maintenance expenses can be deducted if the space is used 100% for business.
However, it can be difficult to determine if the space qualifies for regular and exclusive usage, especially if your dental practice is located outside of your home. It is best to consult with a tax professional to determine if your work-at-home expenses are deductible.
Business Elements in Personal Vacations
While work may be the last thing on your mind while on vacation, it doesn’t hurt to incorporate a few business elements to qualify certain expenses as business tax deductions.
For example, if you are headed to the Bahamas with your family, make one day a business day where you have a meeting, conduct an interview, and/or take calls. By doing this, you can deduct your airfare as a business expense.
Final Year-End Tax Planning Tips
With 2023 almost in the rearview window, now is the ideal time to start your year-end tax planning. Here are some final tips:
- Always defer your income until the following year and accelerate deductions for the current year. Credit card purchases are a great way to do this. Buy supplies with your credit card before year-end so you can deduct those expenses this tax year but not have to pay them until next year.
- If your practice is a C corporation, look at your profit on December 31, and pay it out to yourself as a bonus to create a $0 net income, thus eliminating double taxation of profit.
- Be wary when buying mutual funds near the end of the year. If you want to avoid capital gains taxes, look at the prospectus to make sure their capital gain distributions were already paid out for the year.
Your Success Is Our Success
Tax planning is a crucial part of successfully running a dental practice in regard to profit, compliance, and efficiency. But staying up to date with tax laws in a complex and always-changing business environment can be overwhelming.
Here at The Dental CFO, dental practice tax strategy and practice management are our focus. We stay up to date on the latest tax compliance laws so you can focus on providing the best care to your patients.
Our financial experts are here to handle the complexities of year-end tax planning and growing your practice. Connect with The Dental CFO now to help minimize your tax burden.