As the year comes to a close, it’s a smart move for dental practice owners to consider some key steps for effective year-end tax planning. Simplifying the process can make a big difference in managing your practice’s finances. Here are some practical considerations:
1. Equipment Purchases:
Begin by conducting a thorough assessment of your current equipment. Identify any outdated or malfunctioning items that may be affecting the efficiency of your practice. For instance, stay informed about advancements in dental technology. If there are innovations that can enhance patient care, streamline operations, or improve overall efficiency, it may be a good time to consider an upgrade.
To do this effectively, distinguish between urgent equipment needs, such as replacing broken or obsolete items, and non-urgent needs, like upgrading for improved features. This helps prioritize investments based on immediate requirements. This is especially pertinent when you consider depreciation.
Depreciation is a crucial aspect of managing the financial impact of equipment purchases, including whether to spread the cost over time or to expense the entire amount in the current tax year under Section 179. Of course, having a CFO in your corner can help with supplier negotiations as well.
2. Office Building Updates:
Any changes made to your dental facilities, whether it’s a simple renovation or a complete construction project, can have significant tax implications. It’s crucial to understand how these changes affect your practice’s financial landscape. For example, major renovations may involve substantial improvements to existing structures, while new construction refers to building from the ground up.
A CFO can help build out a cost segregation study. This is a valuable tool when it comes to understanding and categorizing the costs associated with facility changes. This can help differentiate between various components, such as building structures, personal property, and land improvements.
While there’s a number of benefits to the cost segregation study, one involves the proper tax categorization and accelerated depreciation. For example, by identifying personal property components with shorter depreciable lives, you can accelerate the depreciation deductions, resulting in potential tax savings in the earlier years of asset ownership.
3. Standard & Itemized Deductions:
Dental practice owners should assess their unique financial situation when deciding between the standard or itemized deduction. Consider factors such as business expenses, home office deductions, and other practice-related costs that could impact your overall deduction strategy. Since you’re likely to incur specific business-related expenses (such as equipment purchases, office supplies, and staff salaries), These expenses can influence whether taking the standard deduction or itemizing provides greater tax benefits.
Given COVID’s profound impact on the medical industry, telehealth and administrative work can be conducted from home. As a result, dental practice owners may be eligible for home office deductions. Carefully evaluate these deductions and how they contribute to your overall tax situation.
Additionally, many dental practices foster investments that can influence whether to take the standard or itemized deduction. These investments could include continuing education, professional memberships, or specialized insurance.
And, given that tax laws can have an impact on the dental industry, taking a proactive approach and staying informed can impact your deduction strategy.
4. Capital Gains and Losses:
Dental capital gains and losses can be strategically utilized to optimize the financial position of a dental practice. Here are specific considerations for dental capital gains and losses:
- Equipment Depreciation:
- Capital Gain: When you sell dental equipment or assets that have appreciated in value, it results in a capital gain.
- Strategic Utilization: Plan equipment upgrades strategically to coincide with the sale of existing assets. Consider the timing to optimize capital gains tax implications.
- Real Estate Transactions:
- Capital Gain: If a dental practice owns property, selling it at a profit results in a capital gain.
- Strategic Utilization: Assess the potential for capital gains when considering selling or acquiring dental practice real estate. Explore tax-deferred exchanges or other strategies to manage capital gains.
- Investments in Dental Technology:
- Capital Gain: Investments in cutting-edge dental technology that appreciate in value can lead to capital gains.
- Strategic Utilization: Stay updated on technological advancements and strategically time technology investments to coincide with potential gains. Evaluate the tax implications of selling or upgrading technology.
- Business Structure Changes:
- Capital Gain/Loss: Altering the structure of the dental practice, such as converting from a sole proprietorship to an LLC, may result in capital gains or losses.
- Strategic Utilization: Consult with financial and legal professionals to assess the implications of business structure changes. Strategically time changes to manage potential gains or losses.
- Investments in Education and Training:
- Capital Loss: If the practice invests in education or training programs that do not yield the expected returns, it may result in a capital loss.
- Strategic Utilization: Evaluate the effectiveness of educational investments and make informed decisions. Recognize capital losses when strategically beneficial.
5. Business Meals and Working at Home:
This can be tricky especially if you do not document this meticulously the first time. First and foremost, you need to substantiate the expenses, keeping detailed records for all business meals, including receipts, invoices, and records of the business purpose. Proper documentation is crucial for substantiating expenses in case of an audit.
Second, ensure that there is a clear business purpose for the meal. Business discussions, meetings, or activities should be associated with the meal, demonstrating that the expense is directly related to the conduct of your trade or business.
So, for example, a meal while working from home is likely not deductible, but if your office was ground zero for a new virus and you’re forced to quarantine outside of your home and conduct your business from a hotel, that’s something that warrants consideration. Again, this needs to be meticulously documented, tied to the business, and not lavish or extravagant. Additionally, there’s usually a 50% deduction limit — so keep that in mind.
Final Tips for Dental Practice Owners:
Defer income to the following year and accelerate deductions for the current year. Consider paying out profits as bonuses for C corporations. Be cautious with mutual fund purchases near year-end to avoid capital gains taxes.
Navigating tax planning can be complex, but with a focus on these key areas, dental practice owners can make informed decisions. Remember, staying connected with financial experts, like a CFO specializing in dentistry, can help streamline this process and ensure compliance with evolving tax laws. Their expertise can support your practice’s growth and financial success.
Photo by Atikah Akhtar on Unsplash