Tax Deductions for Dental Practices

Year End Tax Strategies for Dental Practices

August 21, 2023 by Omar Virjee

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:

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.
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
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.
Charitable Contributions: If your business is considering making charitable contributions, make them before the end of the year to take advantage of deductions.
Healthcare Expenses: Ensure that you’re maximizing health-related tax benefits, such as contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs).
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.
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.
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.
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.
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.
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.
Consider Year-End Bonuses: Evaluate whether year-end bonuses for employees or owners make sense for your business. These can be deductible expenses.
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.
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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Using Short Term Rental Strategy to Lower Taxes for your Dental Practice

February 15, 2023 by Omar Virjee

If you have a highly successful dental practice, one of your key pain points will be rising taxes. One unique strategy that can be used to lower the overall family income is the STR strategy.

In this strategy first you purchase a home and then list it on Airbnb or a similar platform where you rent the home for on average 7 days or less to each guest.

Next you materially participate in all of the management and maintenance. (You can’t hire a management company)

Once you have your rental setup, you then complete a Cost Seg Study which will give you audit proof backup on how much of the home purchase price you can write off using bonus depreciation.

Lastly you write off allowable bonus depreciation which will generate a large loss. You then take that loss against your dental practice income on your personal tax return and you have effectively saved tens of thousands on taxes!

Key Points to Remember and Take Away

Don’t just buy a property for tax write off purposes, make sure it makes sense
This strategy works best if the total investment is 500k or higher, because $500k investment will yield approximately $100k in tax deductions which will help lower taxes by $20k-$30k
Bonus Depreciation is phasing away so this strategy makes less sense in 2024 and later years
Your Rental must be short term- so tenants are there 7 days or less on average, you cant have long term tenants and use this strategy
This is a complex strategy so talk to your tax advisor prior to trying to implement!
If you are part of our Dental Practice Accounting and Tax Savings Program, we will already be discussing this option with you based on your finances and goals during our Year and Tax Planning Meeting

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For questions please feel free to contact one of our Dental CPA team members by calling 713-396-3172 or emailing omar@virjeeconsulting.com

Disclaimer- Advise in this blog should not be taken as tax advise. Each person’s tax circumstance is different and unique. Using these strategies without full knowledge of the current IRS rules and regulations regarding the specific items discussed can result in heavy fines, penalties and interest. Please discuss the guidance in this document with a tax expert before making any decisions.

Home Office Deduction for Orthodontist

January 15, 2023 by Omar Virjee

Missed Home Office and Mileage Deduction for Orthodontist

Recently we had a new Orthodontist client join our Dental Tax Savings Program. While doing our discovery call to see where we could help reduce his taxes, we realized that the dentists had not been deducting his home office for the past several years since opening his practice. When we asked why, the client said his prior CPA advised him that he could not deduct the home office since he had a practice and all of the work including admin work was done at his office by him or his staff.

Our Viewpoint on why the previous CPA was incorrect

We disagreed and here is our logic.

The dentist ran his office payroll from home. He also reviewed treatment plans, notes for patient records, reviewed and answered emails from home.

Having staff at his practice location does not disqualify him from the home office deduction. The dentist can simply have his office as the location where production is done, patients are seen and his home office can be his administrative office. This strategy not only allows him to take the home office deduction, but allows the client to unlock the mileage deduction of driving from home to his practice daily.

Why? Well because typically driving to work or your business is not deductible. But if you setup your home to be an administrative office, you now have two office locations and driving from one office to the other office is tax deductible mileage.

Requirements

The IRS does have some specific requirements for your home to count as a home office, including:

Documentation
Regular use of the home as an administrative office
Proof of use
Proper structuring of the home office. Example if you are a S Corp you use the quarterly accountable plan vs if you are a sole prop or a partnership you would take the deduction on your personal return.

The Results

We were able to identify $16,000 in deductions from property taxes, home mortgage interest, mileage deductions, home internet, phone, home association fees and more.

Take Away

Make sure to speak to your tax professional about maximizing your tax structure. Also ensure the right home office and mileage strategies are used based on your structure (S Corp/Partnership/Disregarded Entity). If you are deducting your home office and mileage, make sure you are doing it the right way and have taken the steps needed for the IRS to recognize your home as the administrative office for your business, separate from your practice location.

Additionally if you are a 1099 contractor, you can also use this strategy. If you are part of our Dental Tax Savings Program, we include this strategy along with an IRS acceptable Accountable Plan document as part of our year end tax planning meeting.

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For questions please feel free to contact one of our Dental CPA team members by calling 713-396-3172 or emailing omar@virjeeconsulting.com

2022 Last Minute Year End Tax Deduction Ideas for Dentists

December 13, 2022 by Omar Virjee

Below are some last minute tax deduction ideas for Dental Offices to Consider. If you are part of our Tax Planning and Consulting Program, we already incorporated most of these ideas into your 2022 strategy to lower your tax payments. But this is a good refresher to see if anything was missed before the end of the year.

1: Prepay Expenses Using the IRS Safe Harbor Method

Under this safe harbor, your 2022 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 30, 2022, you mail a rent check for $36,000 to cover all of your 2023 rent. Your landlord does not receive the payment in the mail until Tuesday, January 3, 2023. Here are the results:

You deduct $36,000 in 2022 (the year you paid the money).
The landlord reports taxable income of $36,000 in 2023 (the year he received the money).

2: Stop billing patients or submitting insurance claims, so reimbursement checks are sent to you in January instead of Dec.

Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2022 income by moving that income to 2023.

3: Buy Equipment or Dental Supplies and place into service before Dec 31st

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2022.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4: Fix the your Qualified Improvement Property deduction

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date you place the building in service.

The big deal: QIP is not real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2022, you must place the QIP in service on or before December 31, 2022.

Planning note. If you have QIP property on an already filed 2019 return that you did not amend, it’s on that return as 39-year property. You need to fix that—and likely add some cash to your bank account because of the fix.

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For questions please feel free to contact one of our Dental CPA team members by calling 713-396-3172 or emailing omar@virjeeconsulting.com

Dentist with Real Estate Case Study

November 11, 2022 by Omar Virjee

Case Study

Income before planning: $951,596

Income Tax before planning: $317,018

Income Tax after planning: $9,766

Savings: $307,252

Strategy Used: Multiple, including real estate, Cost Seg, time of write offs

A dentist that owned two successful offices came to us with a huge estimated tax bill. The client owned the real estate upon which both offices were located. We were able to engage our partners and perform a Cost Seg study and bonus depreciate a portion of the buildings. Additionally, we were able to time the purchase of some of the client’s new equipment to have additional savings for 2021 and 2022 tax year.

Few Quick Tips to discuss with your Business Tax Consultant

Should I purchase the real estate with my business, if so what are the tax benefits?
Does Cost Seg benefit my specific situation?
How can I time the purchase of equipment I need to best benefit me over the next two years vs just this year?

Businesses that involve Real Estate and or equipment have lots of opportunities for tax planning. Be sure to discuss with your business tax consultant all of the options available to you. Feel free to reach out to us if you have any questions or feel you may be overpaying in taxes.

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Q4 Tax Planning Moves for Dental Practices to Consider

August 16, 2022 by Omar Virjee

As crazy as it sounds we are close to heading into the final Quarter of the year. This is an important time to review your current tax strategies to make sure they are fine tuned to maximize savings for 2022 along with having a discussion over what the practice landscape will look like in 2023. A few key points you should be considering:

Tax Planning and Savings Points to Consider before Year End for Dental Practices

Entity structuring
- Is your practice, or practices in the correct tax structure.
- If you are not a S Corp, or if you recently purchased or built a practice, then the timing of the S Corp Election is crucial to maximize current and long term savings. Why? Well because if you elect too early, you can loose out on future deductions. However if you elect too late, then you may have a large Capital Gains issue on your hands specifically if you depreciated equipment that you purchased with a loan (build out or if you acquired the practice from another owner).
Timing deductions in order to qualify for the Sec19A Deduction- Free money from the government if your income is below 157k single or 315k married.
Utilizing Accountable Plans in your practice to maximize savings, and tax free distributions from your business.
Retirement Plan contributions from you or your business for tax savings and employee retention
Maximizing Real Estate deductions if you own the building in which you practice
Ensuring proper estimated taxes have been paid to avoid surprises

These are a few of many points of discussion we will be having with our clients in our Year End Tax Planning Meetings in Quarter 4 of this year. If you are working with another CPA firm, be sure these items are part of your year end meeting agenda.

For questions please feel free to contact one of our Dental CPA team members by calling 713-396-3172 or emailing omar@virjeeconsulting.com

Written by Omar Virjee, CPA.

picture of attractive female doctor with toothbrush and jaws

Disclaimer- Advise in this blog should not be taken as tax advise. Each person’s tax circumstance is different and unique. Using these strategies without full knowledge of the current IRS rules and regulations regarding the specific items discussed can result in heavy fines, penalties and interest. Please discuss the guidance in this document with a tax expert before making any decisions.