Leveraging Effective Tax Strategies for Your Dental Practice

At a glance

• The main takeaway: Most dentists should consider various fundamental tax strategies that they can leverage to boost their financial situation. However, additional complexities may arise due to individual circumstances and changing tax laws.
• Impact on your business: Engaging with a knowledgeable dental CPA can significantly enhance the understanding of available deductions, credits, and planning opportunities that can contribute to more effective tax management.
• Next steps: Aprio’s team of Dental CPAs and advisors can help you understand and provide highly-tailored tax strategies depending on your situation and needs.

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The full story:

Most dentists should consider various fundamental tax strategies that they can leverage to boost their financial situation. However, additional complexities may arise due to individual circumstances and changing tax laws. Engaging with a knowledgeable dental CPA can significantly enhance the understanding of available deductions, credits, and planning opportunities that can contribute to more effective tax management.

The importance of proactive tax planning with a dental CPA

Much like you hear about retirement planning, the best time to start adopting a proactive approach to tax planning is now. It’s never too late to begin saving from a tax standpoint. Planning ahead with a dental CPA can help leverage effective tax-saving strategies and implement them promptly rather than waiting for years to realize their benefits and regrets about missed opportunities.

The most common (yet effective) tax-saving strategy

Retirement plan funding is one of the most widely known, effective tax-saving strategies. Contributing to a retirement plan offers immediate tax benefits, permitting individuals to defer taxes until withdrawal, typically at retirement age. While Health Savings Accounts (HSAs) also provide significant advantages, they come with contribution limits and the requirement to use funds for qualified medical expenses only.

Additionally, implementing a 401(k) or qualified retirement plan can yield substantial benefits, especially with many states now requiring such plans for businesses. Tax credits are available to offset the costs of establishing these plans, providing a dollar-for-dollar reduction in tax liabilities. Our dental CPAs and advisors specialize in helping dental practices navigate these opportunities, assuring they boost their retirement benefits while providing valuable options for their team members.

This is a very important note: the sale of your dental practice must not be the sole strategy for your retirement plan, as this may represent significant oversight for many dental professionals. We strongly advise integrating your retirement plan with your investment portfolio as a fundamental component of a comprehensive personal wealth-building strategy.

As a business owner, you can make substantial, tax-deductible contributions to your retirement account, benefiting your personal finances and your employees. Contributions, whether matching or profit-sharing, lower your taxable income and help reduce employee turnover in your dental practice.

Exploring other industry-specific tax strategies and benefits

There are many strategies that can help dental practitioners improve their practice’s financial health and operational efficiency. While some strategies are widely applicable, others may suit seasoned dentists. These strategies will be highly effective with the proper guidance of a knowledgeable dental CPA. Below, we delve into several high-level concepts that could align with your practice’s goals and objectives.

The “Augusta Rule”, defined under IRC Section 280A(g), allows homeowners to use their personal residence for business purposes for up to 14 days each year without incurring tax liabilities. This provision offers dentists an advantageous opportunity to host team events or meetings in their homes rather than incurring significant expenses associated with hotel or conference space rentals. Homeowners can achieve substantial tax savings by leveraging their homes, often amounting to thousands of dollars annually.

The phaseout of bonus depreciation significantly impacts businesses with capital expenditures. Bonus depreciation allows businesses to write off a large percentage of an asset’s cost in the first year, contrary to standard depreciation rules in which businesses may be required to spread out the cost of capital purchases over many years.

Under the TCJA, businesses could deduct 100% bonus depreciation for qualified property from September 2017 to the end of 2022, compared to 50% in previous years. The phase-out started in 2023 with a 20% reduction, decreasing by another 20% each subsequent year until January 1, 2027. Remember, different states have varying rules regarding bonus depreciation. It is essential to have a dental CPA who understands these state-specific regulations.

In some cases, where practices experience great profitability, it may make more sense to leverage the Section 179 deduction for purchases of depreciable business equipment.  However, we advise against purchasing unnecessary equipment or technology solely for tax benefits. A common mistake we see is when dentists invest in items they do not truly need or will not use effectively, driven only by the desire for tax deductions.

Our primary goal as a dental CPA is to help our dentists build wealth and set the practice up for continued growth.

The bottom line

Understanding and leveraging the various tax-saving strategies that fit your situation and needs can significantly benefit your dental practice’s financial health and your personal wealth. Consulting with a dental CPA is essential to refrain from surprises and unforeseen challenges during tax season, and Aprio’s Dental Team can help you navigate those proactively. Schedule a consultation with us to get started.

Related Resources/Assets/Aprio.com articles/pages

• Aprio Dental Service Page
• Tax-Efficient Retirement Planning Tips for Dental Practice Owners
• Making the Most of Tax Deductions with Declining Bonus Depreciation