This is a summary of the webinar, hosted by Henry Schein Dental with featured speaker, Mark Rosen, CPA, CFP®. You may watch the webinar here.
Owning your own business can be extremely rewarding, yet dealing with tax year-end tax planning is one area most practitioners dread each year. To help dentists with this complex issue, we’re pleased to introduce Mark Rosen, CPA, CFP®, and partner at Rosen and Associates, LLP. Mr. Rosen’s firm focuses exclusively on the dental industry, servicing approximately 800 dental practices across New England in addressing accounting, bookkeeping, and tax planning. Mr. Rosen is also a member of the Academy of Dental CPAs, an organization that provides progressive consulting, accounting, and tax services to dental professionals. In this webinar, Mr. Rosen helps dentists navigate key year-end tax planning issues and sheds light on how to reduce their tax burden.
Understanding Your Tax Bracket
“To understand where we can save you money in taxes, we first have to look at the tax brackets,” Mr. Rosen said. “In the last couple of years, with the new tax planning changes, the tax bracket changed a little bit. If we look at the Married Filing Jointly column, you can see that all the way up to 32%, it is double the single. A single filer, at 32%, you’re going to cap out your income at $204,100, and then married filing jointly at $408,200. Then the piece above that is then getting taxed at 35%.”
“However, if you can look at that 35% line, you’ll see that $612,350 in the Married Filing Jointly column is not double $510,301. In this case, you catch up to those higher tax brackets a lot quicker. That makes a difference, because when you’re starting to make bigger purchases, and dropping income at different spots, or not, you’re hitting different tax levels quicker.”
Tax Planning and Projections
If you only talk to your CPA during tax time, you may want to reconsider your CPA, or your decision to be an annual client. There are lots of steps you can take before the end of the year to earn tax benefits. This is a good time of year to reach out to your CPA, and they can help identify two numbers that are extremely important: your taxable income number, and your Qualified Business Income (QBI) deduction amount. The latter is a free deduction that you can take simply by having a practice, although, there are limitations as to which taxpayers are able to take the deduction. QBI deduction is a calculation in which some taxpayers can deduction up to 20% of their qualified business income (practice income for the most part). In order to receive any QBI deduction, your taxable income needs to be below $421,400 if you file married filing jointly or $210,700 if you file single.
“Let’s say for example your taxable income is $321,400- $421,400 married filing jointly or $160,700-210,700 filing single,” explains Mr. Rosen. “As a sole proprietor, LLC filing as an S-corp or partnership, a single-member LLC, or an S-corporation, you’re eligible for a 20% qualified business income deduction, or a portion of it.”
“It’s important to note that this deduction is not available to C-corporations. If you’re a C- corporation, you should speak with your CPA to better understand why you are in this entity structure. While the rate change is 21% there is double taxation as well as different issues with having a C-corp.”
Your capital gains, your interest and dividends from your investments, and your spouse’s income all add together to create your taxable income number. Your CPA can do a tax projection to help you understand where that number stands now.
Let’s look at one case involving a dentist filing a married joint return. His partnership income is $200,000 and his spouse’s wages are $75,000 outside of the practice. “In this case, the taxable income is below $321,400. He’s able to take his partnership, which is his dental income of $200,000 multiply it by a straight 20%, and get a free $40,000 deduction, simply by having his income below that threshold. “That’s $9,600 of federal savings right there, because the taxable income went from $275,000 to $235,000,” said Mr. Rosen.
Another example would be a dental practitioner with an income over $421,000. If the taxable income is $425,000, the practitioner gets no QBI deduction. However, the practitioner then makes a $10,000 purchase of cabinets, he would receive a $1,900 QBI deduction, effectively making the $10,000 purchase into a $11,900 purchase, saving him an effective tax rate of 42% assuming he is currently being taxed at the highest tax bracket.
If the dentist instead invests $110,000 in an intraoral scanner, he now can drop his income from $425,000 to $315,000, using Section 179 of the Internal Revenue Code. By doing so, he has opened the doors to a full 20% QBI deduction. He’s now able to get an additional $19,000 QBI deduction, so his $100,000 purchase got him an almost $120,000 tax deduction.
“There are many strategies for getting your taxable income into the QBI wheelhouse,” said Mr. Rosen. “IRS Section 179 is one method, which allows a taxpayer to elect to deduct the cost of certain types of property in 1 year in order to reduce their taxes. Talk to your CPA about the right technique for reducing taxes from these investments. In some instances, you may want to potentially spread that deduction out over time.”
Retirement contributions are another way to reduce your income and lower your tax liability.
If you or your spouse are not a participant in another retirement plan, you can contribute to a traditional IRA. The maximum contribution amount is $6,000, if you’re under 50 or $7,000 if you’re over 50 years old. This money grows tax deferred.
If you’re a participant in another retirement plan you can contribute to a non-deductible traditional IRA. This money will grow tax-free. However, similar to a traditional deductible IRS, before you turn 70 1/2, you must begin taking the money out. These withdrawals are called required minimum distributions. They must begin before April 1st of the year following the year you turn 70 1/2. For these plans, you are penalized half the amount you were supposed to take, if you don’t take your required minimum distributions.
“If you are currently 70 1/2, and you have IRAs or old rollover 401Ks, and you have not taken your required minimum distribution, speak with your financial adviser, because you did a good job saving the money, and you don’t want to give it up,” said Mr. Rosen.
Traditional IRAs grow tax-deferred, not tax-free. “The beauty of a Roth IRA is that when you do get money in there, it grows tax-free,” said Mr. Rosen. There are income limitations which prevent everyone from putting money directly into a Roth IRA. “It is after-tax dollars, that grows tax-free. However, you never need to take the money out. Unlike a Traditional IRA, where money must begin to come out at 70 1/2. With a Roth IRA, it doesn’t. “Assuming that’s money you don’t need, this is a great estate planning tool, to then be able to grow your entire life, hand it down to the kids, and then they can grow it during their lifetime.”
Retirement plans inside of your practice, like a 401k, defined benefit plan or a cash balance plan are other options to consider. A cash balance, which is a hybrid between a defined benefit plan and a 401K are a great way to put away a lot of money.
“Retirement plans are great, because you’re getting money for yourself and letting it grow tax-deferred over time, or tax-free, depending on which program you choose,” Mr. Rosen said. “And in some cases, you’re giving yourself the opportunity to reduce your income further and possibly get a QBI deduction. Talk to a financial planner about which option is right you for you.
Family on the Payroll
There are several tax issues that arise when having a spouse or child on the payroll. For example, if your spouse is paid $30,000 a year and you don’t have a retirement plan, you’re not actually saving anything. “In fact, in this case you’re wasting Medicare and Social Security money,” explains Mr. Rosen. “If you simply pay yourself more and you’re already over the Social Security limit, all you’re paying is Medicare. However, if you defer $19,000 into a retirement plan, now you’re only getting taxed on the difference between gross wages and the retirement contribution minus some payroll taxes, so you’re saving a lot of money.”
There are also considerations when having children on the payroll. First they need a job description. “But another important point to remember is that you cannot pay them once a year,” Mr. Rosen said. “You have to pay them like any other employee. For example, say you pay your college-age son $20,000 to manage your social media presence. You need to put him on the payroll, not give him a lump sum at the end of the year or by a 1099. He’s not going to pay taxes on the first $12,200, and then for the next piece, he’s going to pay taxes at probably a 10% level.” Since you may be taxed at a much higher bracket, the income shift can lead to significant tax savings.
When preparing your taxes, you’ll want to consider which expenses are reasonable expenses to deduct. Issues to keep in mind include:
- Auto expenses. If you drive between multiple offices, you can deduct expenses such as gas, tires, and vehicle maintenance (note: your commute from home to the office is not deductible).
- Charitable contributions. “With the new tax laws, the standard deduction has been increased, and a lot of people are not getting benefits from their charity,” Mr. Rosen said. “If you don’t have a mortgage anymore, and you’re getting delimited on your $10,000 of taxes, you need to give a lot of money to charity before you get a deduction. Therefore, look at the charity as a marketing opportunity. Write the check from the business account, maybe write a letter, and include your logo.”
- Meetings, seminars, and travel. “These are opportunities to take different deductions,” Mr. Rosen said. “Everything should have a business purpose to it. Meals are still a 50% deduction, and it’s all meals. Meals in the office are a 50% deduction, too.”
- The IRS has taken away deductions for entertainment, so those are not deductible.
- Leased items – These can be deducted, but only as lease payments, not at the value of the equipment. For example, if you’re leasing a $100,000 piece of equipment, you can write off the lease payment made over the year, not the total value of the equipment.