Virjee Consulting, PLLC

Dental Accounting and Tax Services

How Should I Prepare My Dental Practice for a Possible 2024 Slow Down?

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The dental industry, like any other, isn’t immune to a slowing economy. As we approach 2024, Property taxes, property insurance costs, inflation, and changing tax laws all loom large on the horizon, prompting dental offices to prepare for a possible economic slowdown. But that does not mean that we must face this uncertainty ignorant or alone. Here we discuss some best practices for preparing your business for a tumultuous 2024.

 

What Should You Expect for 2024?

  1. Rising Costs: Property taxes and insurance premiums are on the rise, potentially increasing rent expenses for dental office spaces.
  2. Inflation-Driven Wage Increases: Inflation will likely lead to higher wages for hourly staff.
  3. Softness in Collections: The first half of 2024 may see slower collections as patients become more cautious with their spending.
  4. Higher Taxes: Anticipate higher taxes as some deductions passed during the Trump Administration phase out.

 

What Should You Do to Prepare for 2024?

  1. Collaborate with Your Dental CPA: Work with your dental CPA to create a budget and forecast for your practice.
  2. Invest in Real Estate: If possible, invest in real estate in 2023 before less favorable tax laws take effect.
  3. Build Cash Reserves: Maintain 3-4 months of operating expenses in cash reserves.
  4. Boost Marketing Efforts: Invest heavily in marketing to attract new patients and offset lower collections and case acceptance rates.
  5. Explore Practice Acquisition: During a slow down there could be opportunities to expand your practice at a lower investment then a typical new build. Consider purchasing an office from retiring dentists with a solid infrastructure in place.

 

In summary, being proactive in the face of economic uncertainty is key for dental offices in 2024. Expect rising costs, wage inflation, softer collections, and higher taxes, and take action by collaborating with your CPA, investing wisely, building reserves, enhancing marketing efforts, and exploring practice acquisitions. These strategies will help your practice weather future economic challenges and thrive.

Here is to your best financial future

The VC Team

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Driving the Valuation of your Dental Practice

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For most dentists, their practice plays two major parts of their finances:

  1. The largest cash producing asset they have
  2. One of the largest or if not the largest portion of the dental practice owners assets.

 

If the two statements hold true for you then there are two actions that should be focused on:

  1. Ensuring the practice is running at its optimal profitability
    • To do this we must know our goals and what we should be measuring

2. We should be focusing on increasing the value of our practice by focusing on EBITDA.

  1. EBITDA (Earnings before Interest, Taxes, Depreciation, Amortization)
  2. The above should be calculated by a professional that understands the Dental Industry.

What happens when the Dental Practice Owner Focuses on the two actions above:

  1. Your Dental Practice becomes a business that is not dependent on you, and it delivers after Doctor Compensation cashflow that exceeds your competition and allows you to reinvest in growth and other assets that create income for you without you personally doing the production.

2. You Grow your EBITDA (Profit Margin) which each year increases the value of your office

  • This leads to the creation of wealth for the Dentist.

Example:

While focusing on specific KPI’s the practice increased cashflow by $75,000 this year by working smarter not harder, and focusing on goals they set with their accounting team.

This in turn lead to increased profitability of $50,000 for the practice, which at a 4x multiple increased the value of the practice by $200,000.

The doctor increased cashflow by $75,000 which was invested in other assets, and increased the value of their business by $200,000 in a single year. This is true wealth creation.

Summary

Work with your Dental CPA firm to build a Blueprint of Wealth and Profitability for yourself.

At Virjee Consulting, we have rolled out our Dental Wealth and Profitability Blue Print where the clients are given personalized goals and reports to grow the value of their practice.

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Year End Tax Strategies for Dental Practices

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Quarter 4 is an important time for Dental Practice owners and Dentists working as Independent Contractors to make strategic tax moves to optimize their financial situation before the end of the tax year. Here are some tax moves to consider in the fourth quarter:

  1. Review Financial Statements: Begin by reviewing your financial statements for the year. This will help you understand your current financial position and identify areas where you may need to make adjustments.
  2. Maximize Deductions:
    • Section 179 Deduction: Consider taking advantage of the Section 179 deduction for qualifying equipment and property purchases. In 2021, you could deduct up to $1.05 million, subject to certain limits.
    • Bonus Depreciation: Evaluate whether you can benefit from bonus depreciation, which allows you to write off a significant portion of certain asset purchases in the first year.
    • Purchase or Build another location: You can use a combination of the above two strategies in conjuncture with opening another location prior to 12/31
  3. Tax Credits: Investigate tax credits available to your business. Research and determine if you’re eligible for credits such as the Work Opportunity Tax Credit, Research and Development Tax Credit, or others that may apply to your industry.
  4. Charitable Contributions: If your business is considering making charitable contributions, make them before the end of the year to take advantage of deductions.
  5. Healthcare Expenses: Ensure that you’re maximizing health-related tax benefits, such as contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs).
  6. Retirement Contributions: Contribute as much as possible to retirement accounts, such as a 401(k) or SEP-IRA. These contributions are tax-deductible and can help reduce your taxable income. The amount you can deduct depends on your business structure, so we advise running your scenario past your tax consultant to ensure you don’t contribute over the limit allowed if you have employees.
  7. Purchase Real Estate Using the STR Strategy: This is a more complex strategy but you can get significant tax savings by purchasing a property and turning it into s Short Term Rental (AirBnB). Be sure to consult with your tax consultant prior to using this strategy as it as many complexities.
  8. Purchase the Real Estate your Dental Practice Operates from: You can use this strategy in conjecture with additional real estate strategies to significantly lower your tax burden. Beware there are strict rules to follow to qualify for the large deduction. Consult with your tax consultant to see if this would help you prior to making any purchases.
  9. Hiring your children in a separate business outside of your practice: There is significant potential here, especially if you have teenage children. However most Dental Practices are S corps and the strategy blows up here. However if you or your spouse own a different business there can be some savings implemented once al the pieces are reviewed.
  10. Quarterly Estimated Taxes: If your business pays quarterly estimated taxes, make sure you’re on track and adjust your payments if necessary to avoid underpayment penalties.
  11. Review Tax Law Changes: Stay up to date with any changes in tax laws or regulations that could impact your business. Consult with a tax professional to understand how these changes affect your situation.
  12. Consider Year-End Bonuses: Evaluate whether year-end bonuses for employees or owners make sense for your business. These can be deductible expenses.
  13. Record-Keeping: Ensure that your financial records are accurate and up to date. Good record-keeping is essential for tax compliance and can help you identify opportunities for deductions.
  14. Plan for Next Year: Use this time to start planning for the upcoming tax year. Consider any changes in your business structure, goals, or operations that might impact your tax strategy.

Remember that tax laws can change, so it’s essential to stay informed and adapt your tax strategy accordingly. Work with a Dental Tax Strategist who can provide personalized advice based on your specific business situation.

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IRS cracking down on ERC shops which could lead to costly audits for small businesses including Dental Practices

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ERC Shops Targeting Small Business Owners including Dental Offices

Over the past two years, ERC shops have poped up across the country and used questionable and aggressive marketing tactics to lure small business owners to signup for their Employee Retention Credit services.

These shops often lured in unsuspecting business owners including dental office owners with large ERC refund checks. They often provided little to no backup behind the qualifications they used for these periods. Many used the supply chain or vague governmental orders test.

 

IRS Now Aggressivly Pursuing ERC Claims

The problem was the IRS was too behind to provide any real specific clarity. Now as the IRS catching up, they are cracking down on small businesses that applied and got these ERC refunds, by clawing back the refunds and imposing heavy fines, penalties and interest on the tax payer. This combined with the cost of representing themselves in the audit, CPA and Legal fees can be a significant sum.

Recently the IRS provided clarity and specifics on what they are looking for when it comes to supply chain disruption as a qualification. This weeds out a large chunk of the grounds these aggressive ERC shops were using to apply for the large refund claims.

 

What to do if you used a third party for your ERC claim

  • If you are a Dental Practice owner and used a third party ERC firm, be sure to be aware of updates regarding ERC being posted by the IRS.
  • Secondly be sure you clearly understand the qualifications they used to apply for the credit. If one of the qualifications is supply chain disruption, changes are the money needs to be paid back.

 

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How Dental Practice Owners Can Deduct their Next Vacation

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Dental practice owners can make the most of their professional development by combining business and pleasure. By strategically planning their trips and adhering to IRS rules, they can write off vacation expenses while traveling for Continuing Education (CE) courses.

Example: Let’s consider a scenario where Dr. Smith, a dental practice owner, attends a 5-day CE course in San Diego. Dr. Smith plans the trip strategically to combine business and vacation activities. Here are the circumstances under which this trip could potentially be tax deductible:

  1. CE Course Activities: Dr. Smith dedicates the majority of their time (e.g., 4 out of 5 days) to attending the CE course. They actively participate in seminars, workshops, and networking events, demonstrating their commitment to professional development.
  2. Business Purpose: Dr. Smith can clearly establish that the primary purpose of the trip is for educational and business-related activities. They maintain records of course registration fees, educational materials, and receipts related to the CE course.
  3. Travel Expenses: Dr. Smith keeps detailed records of their travel expenses, including round-trip airfare to San Diego, hotel accommodations for the duration of the course, and ground transportation expenses (e.g., taxi fares or rental car costs) directly associated with business activities.
  4. Itinerary and Schedule: Dr. Smith maintains an itinerary that outlines the specific CE course activities, indicating the time spent on educational events and networking opportunities. They also allocate some personal time for vacation activities but ensure the majority of their time is dedicated to business activities.
  5. Documentation: Dr. Smith retains all receipts, invoices, and documentation supporting their business-related expenses. This includes receipts for meals with colleagues during the course, transportation to and from the conference venue, and any other relevant business expenses.

It is important to note that individual circumstances may vary, and specific details should be discussed with a qualified accountant or tax professional. They can provide personalized advice based on Dr. Smith’s financial situation and ensure compliance with the IRS rules and regulations regarding travel deductions for dental practice owners.

 

Maintaining Dental Practice Profitability in the Current Economic Climate

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In today’s economy, dental practices are facing increased competition, rising costs, and changing patient expectations. However, there are several strategies that dental practices can implement to increase their profit margin and remain competitive in the marketplace.

  1. Focus on patient retention: One of the most effective ways to increase profit margins is to retain existing patients. This means providing exceptional patient care, building strong relationships with patients, and offering personalized services and treatment plans. Happy patients are more likely to refer friends and family to your practice, resulting in increased revenue and a stronger bottom line.
  2. Implement cost-saving measures: Dental practices can reduce costs and increase profitability by implementing cost-saving measures such as negotiating with suppliers for better pricing, improving inventory management, and optimizing scheduling to reduce downtime and increase efficiency.
  3. Invest in technology: Technology can help dental practices increase efficiency, improve patient care, and streamline operations. For example, investing in digital x-ray technology, electronic health records, and online appointment scheduling can reduce administrative costs and improve patient satisfaction.
  4. Expand services: Dental practices can increase their revenue by expanding their services to include cosmetic dentistry, orthodontics, and other specialized treatments. Offering these additional services can attract new patients and increase revenue from existing patients.
  5. Marketing and advertising: Effective marketing and advertising can help dental practices attract new patients and increase revenue. Utilizing social media, search engine optimization, and targeted advertising can help dental practices reach a larger audience and increase patient traffic.

In conclusion, dental practices can increase their profit margins by focusing on patient retention, implementing cost-saving measures, investing in technology, expanding services, and effective marketing and advertising. By adopting these strategies, dental practices can remain competitive in today’s economy and achieve long-term success