Improve Your Dental Practice’s Financial Health with Tax Planning Strategies

The world of dentistry is demanding, both in skill and dedication. As a dentist, you don’t only wear the hat of a healthcare provider but also that of an entrepreneur. With the endless array of patients to see, treatments to render and administrative tasks to fulfill, it’s easy to push thoughts of tax planning to the back burner. But, just as you prioritize the oral health of your patients, it’s essential to give tax planning the attention it deserves in your practice. 

Why is Tax Planning Important? 

Tax planning doesn’t just ensure you’re abiding by the laws; it’s a strategic approach to guaranteeing the long-term financial success of your practice. A well-structured tax plan allows you to: 

  • Make informed financial decisions 
  • Reduce tax liability for owners 
  • Improve cash flow 
  • Stay compliant with regulatory requirements 

Strategies for a Smoother Tax Season 

  • Find the Right Tax Professional: This is paramount. A tax advisor, or better yet, a dental CPA, should be more than just someone who files your taxes once a year. They should be a business principal with the expertise to guide your practice to financial success. Similar to seeking an associate for your practice, your CPA should be deeply knowledgeable about the industry, helping you navigate tax regulations and offering strategic growth opportunities. 
  • Stay Organized: Yes, the demands of running a dental practice are intense, but staying organized can significantly lighten your load. Regularly communicate with your tax professional, and don’t leave things until the eleventh hour. Invest in automation – whether it’s software or additional staff or outsourcing – to streamline your processes. Ensuring that your financial records, including bank statements and credit card reconciliations, are updated will save you a lot of headaches. 
  • Stay Compliant: The dual responsibility of adhering to healthcare and tax regulations can be daunting. But, staying abreast of tax deadlines, ensuring you set aside cash for estimated tax payments, and maintaining comprehensive records (like billing, insurance and large purchases) can protect you from unwanted penalties or audits.  

Note: Plan for your fourth quarter estimated tax payments. Begin setting aside cash now, aiming for the estimates due by Jan. 15, 2024. By paying these estimates in January, you can minimize underpayment penalties come April. This not only gives you peace of mind but also alleviates the tax burden you might face during the peak tax season. 

  • Maximize Deductions: There are plenty of opportunities to maximize your tax-deductible expenses before the end of the year. Consider investing in new dental equipment, stocking up on supplies (both dental and office) and ensuring that any needed repairs are completed. Employee incentives, like bonuses, parties or professional development courses, can also provide deductions. 
  • Evaluate Your Business Structure: Evaluating your business entity structure is important to receive the most beneficial tax treatment and to protect your personal assets from potential liabilities. Determining the appropriate structure also plays a vital role for succession planning if ownership would ever be transferred or sold.  
    • Sole Proprietorship: Here, you enjoy complete autonomy over your business. Activities reflect on your personal tax return without needing separate filings. However, profits incur self-employment tax, and there’s no legal buffer separating you from potential business liabilities. 
    • Affiliation: A flow-through entity, companies offer single taxation. Though they’re relatively straightforward to establish, it’s prudent to have a company agreement. However, they don’t inherently protect owners from business liabilities. 
    • S Corporation: This entity also enables single taxation. Owners can draw a salary, with only the wages subject to self-employment tax. While advantageous, S Corporations demand a more intricate set-up process and can be pricier. 
    • Limited Liability Company (LLC): An LLC offers versatility, allowing for taxation akin to a Sole Proprietorship, Company or S Corporation. It also provides a protective shield against business liabilities. 
    • C Corporation: While less prevalent in dental practices due to their complex regulatory requirements, C Corporations pose the risk of double taxation. 
  • Employ Family Members Strategically: Incorporating family into your dental practice can be a strategic move that comes with beneficial tax implications. The IRS indeed permits employers in the dental sector to hire their spouse or children. The subsequent salary they receive serves as a tax deduction for the practice. For the children you employ, they will be subject to income tax. However, there’s a silver lining here. The IRS has set a Standard Deduction of $13,850. What does this mean? The initial $13,850 of their earnings essentially remains tax-free. If the child is under 18 years of age, their earnings aren’t subject to FICA taxes, which cover Social Security and Medicare. Furthermore, if they are under 21, their earnings won’t be subjected to the Federal Unemployment Act tax. Such provisions not only increase their take-home pay but also decrease the overall tax burden of the practice.  
  • Maximize Retirement Plans: A robust retirement plan is a testament to your commitment to your employees’ future. Whether it’s the versatile 401(k), the SIMPLE IRA suited for smaller practices or the SEP IRA ideal for high earners, each plan offers distinct advantages. Identify the one that aligns with your practice’s goals and size. Here is more information about the different options:  
    • The 401(k) Plan allows for significant employer and employee contributions, with a flexible contribution structure. A standout feature is the employee matching, which has proven to be a strong retention tool. One thing to keep in mind is this plan requires nondiscriminatory testing and specific administrative tasks. 
    • For practices with 100 employees or fewer, the Savings Incentive Match Plan for Employees (SIMPLE) IRA is an apt choice. Employers can contribute a flat 2% of an employee’s pay or match up to 3% of their contributions. 
    • The Simplified Employee Pension (SEP) IRA enables high contributions. One distinct feature is employers must contribute the same percentage of compensation for all, which might not be ideal for medium to large-sized practices. 
    • The Cash Balance Plan is particularly beneficial for those close to retirement, looking to rapidly increase their savings. While it offers advantages for employees, this plan is best suited for practices with low staff turnover. It’s worth noting these plans require actuarial considerations to comply with IRS regulations. 
    • Profit-sharing Plans are versatile and can be incorporated into various practice sizes. They allow employers to make discretionary contributions. This type of plan is a reflection of a practice owner’s commitment to the long-term financial well-being of their employees, which can be a huge draw for potential hires. 

Questions? 

With the right strategies and relationships, tax planning season does not have to be a dreaded time of the year. It can be a period of reflection, optimization and strategic moves that set your dental practice up for continued success. Remember, in the world of dentistry, prevention is always better than cure. The same applies to your finances. Start early, stay informed and here’s to a prosperous year ahead! Contact an Adams Brown advisor to discuss these and other tax planning strategies that can benefit your dental practice.