Tax Planning for Dentists and Orthodontists

Tax Planning Tips for Dentists and Orthodontists: Maximizing Financial Health

Tax planning is a critical aspect of financial management for dental professionals. The benefits of proper tax planning for dentists and orthodontists include the availability of cash to reinvest in their practices, plan for retirement, and enjoy better long-term financial stability. In this article, we’ll explore various tax planning strategies and comprehensive financial operations specifically tailored to the unique needs of dental professionals.

Understanding Business Structures

Choosing the right business structure is foundational to effective tax planning. Dental professionals can operate under several business structures, each with distinct tax implications:

• Sole Proprietorship: A sole proprietorship keeps business and personal finances separate, which helps limit personal liability for business debts. However, since income is taxed directly on the owner's return, it offers less liability protection compared to other structures like LLCs or corporations.
• Partnership: In this business arrangement, two or more people work together and share financial outcomes. Each partner reports their share of the income on their tax return.
• S Corporation: This business structure offers liability protection and passes income directly to owners for tax purposes, avoiding double taxation. S corporations are ideal for practices with multiple owners.
• C Corporation: This business structure also allows for multiple shareholders and offers limited liability. However, profits are taxed at both corporate and personal levels, which may not be ideal for smaller practices.

An understanding of how to choose the right business structure can significantly impact your healthcare practice's financial stability, legal protection, and overall success.

Maximizing Deductible Expenses

Dental and orthodontic practices incur various deductible expenses that can reduce taxable income if you keep track of them properly. Key deductible expenses include:

• Dental Supplies and Equipment: Your practice can obtain straightforward deductions by keeping detailed records of purchases, including invoices, receipts, and descriptions of items used directly in patient care, such as dental instruments, gloves, and sterilization equipment.
• Staff Salaries and Benefits: Wages, health insurance, and retirement benefits for employees qualify as deductible expenses without much ambiguity. Be sure to keep payroll record documents accurate and organized, including W-2 forms, payroll tax reports, and employee benefit statements.
• Continuing Education: Costs associated with maintaining professional licenses or improving skills through courses and seminars may be deductible expenses. Keeping records of course fees, travel expenses (if applicable), and any certifications or continuing education credits earned can help you obtain deductions.
• Office Expenses: Rent, utilities, and other expenses related to maintaining an office  may be deductible, but they can be subject to stricter guidelines and might require more careful documentation to ensure they meet the deductibility criteria.

Accurate record-keeping is crucial for maximizing tax deductions. Consider using accounting software or consulting a professional bookkeeper to help you effectively track and categorize billable expenses.

Equipment Purchases and Depreciation

Dentist and orthodontist practices often need to invest in expensive equipment. Section 179 Deductions and Bonus Depreciation are valuable tools for managing these costs.

• Section 179 Deductions: Practices can deduct the full purchase price of qualifying equipment purchased or financed during the tax year, leading to substantial tax benefits in the first year of ownership. For detailed guidelines, refer to the IRS Section 179 Information.
• Bonus Depreciation: Equipment that was not purchased recently may qualify for accelerated depreciation (or recognized loss in value), providing a significant upfront tax benefit.

Be sure to utilize Section 179 and bonus depreciation deductions in your tax planning strategy to maximize potential savings.​

Buying versus Leasing Real Estate

Deciding whether to buy or lease office space has important tax implications:

• Buying offers potential tax deductions for mortgage interest, property taxes, and depreciation.
• Leasing allows you to deduct lease payments as a business expense, providing a more predictable cash flow and lower upfront costs.

The tax implications of buying or leasing can vary depending on your specific circumstances, such as the location of the property, local tax laws, and your overall business structure.

Hiring and Employment Taxes

Understanding the tax implications of hiring employees versus contracting with freelancers is crucial for managing payroll taxes.

• Employees: Your hires require your practice to withhold federal and state income taxes, as well as Social Security and Medicare taxes.
• Contractors: Freelance workers do not require withholding taxes but must be reported on Form 1099-NEC. Choosing between employees and contractors can significantly impact payroll tax obligations.

Misclassifying workers as independent contractors can lead to significant penalties and back taxes. If you're unsure whether a worker should be classified as an employee or an independent contractor, consult a tax professional or attorney.

Retirement Planning

Retirement planning is an essential component of a comprehensive tax strategy. Dental professionals have several retirement plan options, each with unique tax advantages:

• 401(k): This common plan allows you to save more and may include matching contributions if you belong to a company. Contributions are tax-deferred, reducing taxable income.
• SEP IRA (Simplified Employee Pension): This plan is typically an ideal fit for self-employed dentists and small practices. It allows for higher contributions and offers flexibility in funding.
• SIMPLE IRA: This option is easier to administer than a 401(k) and suitable for smaller practices. Contributions are tax-deductible and reduce taxable income.

Healthcare professionals often face some challenges when it comes to financial planning and managing retirement accounts, including long hours and irregular schedules that makes it difficult to find time to manage finances, regularly review retirement plans, or seek financial advice. Potential complications from significant student loan debt that can delay their ability to start saving for retirement. To manage these issues, automate contributions to retirement accounts and savings, use financial apps for budgeting, and develop a debt repayment strategy with a financial advisor. If you find yourself struggling to find the right approach to your retirement plan, it may be a good idea to consult a tax professional experienced in healthcare.

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Consulting with Tax Professionals

There are many complexities in tax planning which it may help to seek the help of a  tax professional in navigating. Key questions to ask a prospective tax advisor include:

• What experience do you have working with dental professionals?
• How do you stay current with tax laws affecting my practice?
• Can you advise me in selecting the best business structure and help with retirement planning?

Effective tax planning is a crucial step for dentists and orthodontists to take to safeguard their financial well-being and achieve sustainable growth. By carefully considering their choice of business structure, maximizing deductible expenses, leveraging depreciation benefits, and making informed retirement plan choices, dental and orthodontic professionals can significantly improve their financial situation. Seeking the help of an experienced tax professional can provide invaluable guidance in implementing these strategies, leading to higher cost savings and giving you peace of mind.

Partner with Decimal for Expert Tax Planning

Ready to optimize your tax strategy and improve your practice's financial health? Decimal Tax Services can help. Contact us to schedule a consultation with our tax professionals who specialize in providing bookkeeping services for dentists and orthodontists like you. Let us help you navigate the complexities of tax planning and maximize your savings today!