As accountants who specialize in working with dentists, our firm often has the opportunity to review prior tax returns for potential new clients. This allows us to look at the practice and get a feel for whether or not we may be able to help, and introduce ourselves to potential new clients at the same time.
Through all of these reviews, I’ve noticed a pattern of missed deductions and opportunities to save taxes. The problem is that too many dentists don’t know the right questions to ask their tax professionals, leaving opportunities overlooked. Here are some of the most common ones I’ve seen:
1. Failure to Use S-Corp Tax Status, or Properly Plan Distributions – For many doctors, an S-corp can save a significant amount of tax. However, many dentists are holding on to old C-corps, or never created the corporation or LLC that could have saved them thousands. A successful doctor filing as a sole proprietor, earning $400,000 per year could have saved over $10,000 by electing to be taxed as an S-corp. When considering to be taxed as an S-corp, check to be sure your state tax rules don’t negate too much of the benefit.
2. Section 199 Domestic Production Activities Tax Deduction – If you have CAD/CAM equipment in your office, make night guards, retainers, bond brackets or perform other functions that are considered manufacturing, you are entitled to a tax deduction of 9% of the profit from that activity (subject to certain limitations). For many of our clients, that has been a tax deduction of over $10,000! Be sure to talk to your tax professional about the activities in your practice that qualify as manufacturing.
3. Business Use of Auto – Travel from your personal residence to your office is not deductible. However, travel to the bank, post office, travel to attend CE courses and other business-related trips are deductible. With the new “Simplified Option” method for a home office deduction, many dentists may find an even bigger auto deduction. If there is a portion of your home that you exclusively use on a regular basis as your administrative office, and for privacy reasons you store confidential documents there that you do not want stored at the dental office, you may be able to deduct your trip from your “administrative” office to your “clinical” office. Documentation is the key, but ask your accountant how you can maximize your auto deduction for 2017.
4. 100% Deductible Meals – Many doctors fail to separate the business meals that are 50% deductible from the ones that are 100% deductible. 100% deductible meals include company picnic and parties, staff meetings, office snacks and other meals that are for “the convenience of the employer”.
5. Cost Segregation Studies – Commercial real estate must be depreciated over 39 years. If you have a proper cost segregation study performed, you can carve out certain qualifying portions of the structural components of your dental office that will be depreciated over as little as five years. When you have just built a new building, or built a new rental suite, these circumstances create a significant tax deduction, and right at the time you need it the most! Even if your construction project was three years ago, consider going back to retrieve the accelerated depreciation you may have missed.
Communication with your accountant is the key to taking all of the deductions you’re legally entitled!
Robert J. Gray is a founding member of the Academy of Dental CPA’s and President of Gray Pilgrim and Associates, LLC, a firm dedicated to improving the quality of life and income for Dentists. Mr. Gray is an instructor for Henry Schein’s Dental Business Institute, as well as their Career Development Program. He has lectured to dental teaching programs at several universities, state and regional dental societies and dental study clubs on issues related to both tax and practice management. He is one of the key instructors at the ADCPA week-long continuing education programs called “The Business of Dentistry” recently held in Aruba, St. Martin, St. Croix, Maui and Kauai. To find an accountant who specializes in working with dentists, go to www.ADCPA.org