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  • Writer's pictureStephen Boatman

Tax Planning for Dentists in 2024: 17 Strategies

Updated: Jan 18

Tax planning is one of the best ways to receive a guaranteed return on your dollars. However, it requires good record-keeping, year-round action, and a knowledgeable advisor. Before we start, I wanted to point out two regular mistakes I see dental practice owners make around tax planning.


  • Don't get sucked into the idea of lowering your tax bill for the sake of lowering your tax bill. We often see people spend frivolously or pursue a distraction because there's a deduction tied to it. Be sure your priority is pursuing what is best for your business.

  • You don't always need to fast-track deductions. If you are already deducting your income below the 32% income bracket, delaying deductions for future years in higher brackets may be more advantageous than deducting them this year. However, I understand that having that cash bump today could accelerate business reinvestment.

You should discuss the strategies below with a tax professional before you take action. Everyone's situation is different, and what is best for one practice or owner may not be best for you.


Tax Planning for Dentists-17 Strategies


Business Structure (established as an LLC and taxed as an S-Corp)

This is when you pay yourself as low a salary as feasible and take the rest as a distribution to lower your Social Security or Medicare tax payments. You can read more about this strategy HERE. The main reason people establish as an LLC is because it is cheaper and easier than establishing an S-Corp and they still receive the tax advantages of an S-Corp.


The Master's rule or Augusta rule says that an individual can rent out their primary residence for 14 days per year, and all income from this home rental is tax-free. You must rent it at a reasonable market rate (you can use Airbnb to find an appropriate rate) and conduct business work during the rented days. Examples include an office party, business meetings, masterminds, planning and strategy sessions, and video or audio work. If you rent your home for $1,000/day and are in the 37% tax bracket, this could save $14,000 * .37 = $5,180/year.


Retirement Plans (SEP IRA, SIMPLE IRA, or 401k)

These plans provide a dollar-for-dollar deduction when you contribute to them but are taxed upon withdrawal. If you are in a high tax bracket, 32% +, then consider one of these plans to defer your income to a lower tax bracket year. The best plan depends on a few factors, such as the number of employees, plan cost, if your spouse works with your firm, and your current tax bracket. I recommend discussing which plan is best for your scenario with a financial professional.


HSA Plan

This is the only account in the tax system that helps you completely avoid taxes. You receive a deduction on contributions, investments grow tax-free, and if used for qualifying health care expenses, you can also withdraw tax-free. HSA plans are helpful if you are in a qualifying high-deductible health plan (2024 contribution limit $4,150 for singles and $8,300 for couples). A high deductible is $1,600 for singles and $3,200 for family coverage. Most individuals will spend around $250k on healthcare expenses in retirement so building up to that level before retirement can be a great tax advantage.


CB plans are meant for highly profitable small teams where the owner earns $600k+ per year and is at least age 40. The interesting thing about these plans is that you could defer north of $300k/yr within them (depending on your age and income). You can also have these plans on top of a 401k, SIMPLE IRA, or SEP IRA. There are a few more variables to consider, but if you think you're a good candidate, you can read more HERE.


Home Office Deduction

This is meant for space, within your home, used regularly and only for business activities, and there are two ways to deduct a home office.


The simplified way: The maximum deduction you can receive here is $5 per sq ft up to 300 sq ft., giving you a max deduction of $1,500/yr.


The direct method: If you lived in a 1,000 sq ft home and worked out of 200 sq ft, you could deduct 20% of your home expenses. If living expenses were $10k, you could deduct $2k on your tax return. But what counts as living expenses? Things like rent, depreciation, mortgage interest, utilities, insurance, and repairs.


Hiring a Spouse

This allows the spouse to partake in the retirement plan, deduct business travel for them as an employee, decrease health insurance premiums, and have up to $5,250 deductible as an EAP (educational assistance plan). This strategy becomes more difficult as the number of practice owners increase.


Paying Kids

You can pay kids up to the standard deduction ($14,600 in 2024) for legitimate work and possibly contribute this earned income into a minor Roth IRA.


Example: If you paid your child $7,000 per year from age 0-18, invested these dollars in a roth IRA, the account grew at 7% annually, and they didn't touch this account until they were age 65 then it would be worth $254,652 at age 18 and $6,123,305 at age 65. Tax FREE! I've listed a few kids job ideas below.


  1.  Ages 0-5 - Modeling

  2. Ages 5-10 - Wash windows/clean office, water plants, 

  3. Ages 10-16 - Filing, handing out mailers, answering phones, cleaning company vehicles, landscaping, minor repairs, painting, maintaining the building (lights, air filter, supplies, water filter), research on the internet, price shop, food prep, shred documents, clean uniforms.

  4. Ages 16 -21 - Run errands, answer emails, manage social media, monitor website, edit videos, outsource small tasks to contract workers, host a company event, research competition. 

When paying kids, be aware of the kiddie tax that can sometimes tax the child's income at their parent's income bracket. I've written some about this small but important tax law HERE.


Tax Planning for Dentists in 2024


Equipment Purchases

To accurately account for equipment purchases, you should keep good purchase records. This means accounting for the date of purchase and the date the equipment was placed into service. You must also choose a depreciation method, whether over time or up-front.


  • Section 179 Deduction - Is when you receive an immediate full deduction in the year you purchase the equipment. This deduction is an option even if you finance a large purchase over a few years. It can be used when buying cars, office equipment, business machinery, and computers. However, be aware that when/if the item is sold, you must account for depreciation recapture on the entire sale price since you deducted the whole item in the first year. Section 179 deductions have a limit of $1.16 million/yr.

  • Bonus Depreciation - Although very similar to Section 179 deductions, there are a few differences. Bonus depreciation is currently being phased out. This means you can only depreciate 60% of the overall cost in 2024, and it will decrease by 20% per year until 2027. So, in 2025, you can only depreciate 40% of the overall cost. However, there's no $1.16 mil/yr limit on bonus depreciation, which is an advantage over the 179. Also, you can use section 179 and bonus depreciation in the same year. You can learn more about Bonus Depreciation HERE.


Business Expansion and Cost Segregation

If you plan on building a new structure, buying a new office building, or completing major renovations, it may be worth looking into a cost segregation study. This is where they review your building and separate certain assets that can be deducted upfront vs. what items are depreciated based on their category and lifetime. However, cost segregation studies can mean multi-six-figure depreciations all in one year. They will cost a few thousand dollars and should only be completed on property you plan to hold for an extended period, 10+ years if not longer. Cost seg. studies are best performed on new buildings but can also be done if you've already owned the building or completed the renovation years prior.


Eligible employers can claim up to 100% of qualified startup costs for adopting and maintaining a new 401k plan. Three requirements need to be met before you qualify for this tax credit. The maximum credit, not deduction, is $5,000 and is limited to $250 x # of non-highly compensated employees. This credit is available for the first three years of the plan.


  1. Have 100 or fewer employees who are paid at least $5,000.

  2. Cover at least one non-HCE (highly compensated employee). A highly compensated employee in 2024 is anyone who earns over $150,000 in 2023.

  3. You must not have had a retirement plan in the past three years. You won't qualify if you move from a SEP or SIMPLE IRA into a 401k.

If you think you're a good candidate for this credit then I'd recommend reading the blog through the link HERE to find more details before you decide what to do.


Company Car

It can be challenging to write off the entire vehicle in the dental field. This is because it's hard to argue that even 50% of that vehicle's intended use is strictly for business purposes, as your commute doesn't count as business use. Also, if you ever sell your car, you have depreciation recapture to deal with. However, you can deduct mileage driven for work, outside of your commute, at a rate of 67 cents per mile in 2024. This is often the simplest way to receive a deduction related to your vehicle for work.


EV Tax Credit 

There is a $7,500 tax CREDIT that is available for specific EV's in 2024. However, you must meet a few requirements. Income must be below $150k for individuals, $225k for heads of households, and $300k for married couples filing jointly. This credit isn't refundable, meaning you must owe $7,500 in taxes to receive the full benefit. However, in 2024 most of these credits will likely be passed along in the form of a purchase credit from the dealer.


"For vehicles purchased after April 18, 2023, taxpayers can receive $3,750 or a maximum credit of $7,500 depending on factors such as mineral and battery component requirements" - Investopedia.


Vehicle requirements:

  • Must have 4-wheels, no Reliant Robins

  • It can be used or new, but if it's used, it must be purchased from a licensed dealer for $25,000 or less. Used credits are worth 30% of the car sale price, up to $4k.

  • The vehicle must be under two years old

  • The car must be a plug-in EV, but plug-in hybrids qualify as well. You can see a list of qualifying vehicles HERE

  • Must originate from North America

  • Credit ranges based on battery size

  • MSRP below $55k for sedans and below $80k for trucks and SUVs

  • Some leases qualify for this credit


Pay Property Taxes From Your Company

In 2017, the IRS put a limit on your state and local tax (SALT) deduction of $10,000/year. If your home property taxes are $15,000 for the year, you can only deduct $10,000 of that $15,000, leaving $5,000 to provide no deduction for you and your family. However, you can pay your property taxes through your business and realize a deduction on the entire property tax amount. More variables are at play, as with most tax questions, but that's a high level view. You can read more about this strategy HERE, and be sure to talk with your CPA/EA before pursuing this yourself.


Deduct Vacations

Trips can be deductible for business purposes, including travel expenses and daily expenses during your trip. Expenses are 100% deductible for lodging, tips, and car rentals and 50% deductible for food, excluding alcohol. Be sure to establish a business purpose ahead of time. I've listed out a few common reasons for business trips below.


  1. Go and meet a client who happens to live in Salt Lake City, UT 

  2. Go to a CE event with your spouse, who works with you, in Hawaii.

  3. Board of Directors meeting, with your spouse who works with you, to discuss the future of the company

Charitable Giving

Giving to charity is a simple act that can often be improved upon when looking through the lens of maximizing your charitable deductions. Instead of giving cash from your bank account, I'd encourage you to discuss the strategies below with your financial planner or CPA to see if they could save you more money.


  • Clumping giving - This is where you give in the current year for several future years to increase your total deduction. This could increase your total deduction over the 3-year period from what it would be if you took your standard or itemized deduction every year. You will often need a donor-advised fund to take advantage of this strategy.

  • Giving appreciated stock - If your income is over $44,626 for a single fling status or $89,251 for married filing joint status, then you will pay a minimum of 15% tax on your capital gains. You can avoid this tax by giving your appreciated assets (stock, real estate, or business) to charity, and the charity doesn't pay any taxes when they liquidate the investment. Then whatever funds you would have given away you use to re-purchase the shares and completely avoid the capital gains tax.

  • Donor-Advised Funds - This tool is excellent for realizing a significant deduction in an unusually high-income year, such as the sale of highly appreciated assets, business sales, or outperformance at work.

  • Charitable Deduction Annual Limits: You can only deduct 60% of your income per year from cash contributions and only 30% of your income per year with appreciated asset charitable contributions. However, these contributions do rollover for the next 5 tax years. Giving you a total of 6 years to realize that deduction (the current year and the next 5 years).


Research and Development Credits

Your practice may qualify for this generous R&D credit if you introduce new technology or procedures within the year. This must only be new to your firm, not to the industry. Opening the door for credits on non-routine procedures, using advanced dental technologies, or testing new materials. And no, 3d printers do not count towards your R&D credit. This isn't something we see used much, but I'd hate to leave it out of the list in case it applies to someone. See the link above if you think you may qualify for this tax credit.


College Savings

You can save for college with any investment you like. It can be growing the practice, real estate rentals, or if you go the stock market route, we recommend 529 accounts. These accounts do not provide any deduction when contributing (in NC); states that provide a deduction can be found HERE. But you do get an avoidance of capital gains taxes with assets invested within the 529 account if used for qualifying college expenses. Because the NC 529 plan doesn't provide a state tax deduction, we can shop nationwide for the best 529 plan. Be sure to look for the plan with the best fund options, the lowest cost, and an intuitive website to navigate. Also, because the main benefit of these plans is capital gain avoidance, the earlier you get money into these 529s, the more time it has to compound, and the greater your tax benefit. You can contribute $17,000/yr/per beneficiary/per donor. This means you and grandma could both contribute $17,000/year to one beneficiary's 529 account. Or you could super fund the 529 with up to $85,000 in one year.


I hope you found Tax Planning for Dentists helpful, and feel free to reach out with any questions regarding the strategies above. Have a great year, and happy tax planning.

 

 

 


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