The year is coming to a close, and with it, patient management, sales activities, supplier issues, insurance negotiations and staffing challenges. While rigorous, the daily work of running a dental practice is rewarding, especially when the idea of building a legacy for yourself and your family comes into view. Your hard work and sacrifice has already paid off, and will continue paying off in the future, but are you leaving money on the table?
Tax planning may not be top of mind when you’re buried in work or enjoying precious moments away from the office with family during the busy holiday season, but now is the perfect time to refine your 2023 tax strategy and begin planning for 2024 and beyond.
Starting the year with a proactive approach to 2024 tax planning may be exactly what is required to make 2024 a great tax year. There are a variety of provisions that may potentially reduce a practice’s tax burden. But the key to taking advantage of them is developing a tax action plan now.
Here are a few strategies to start your personal, business, fiscal and tax year off right.
Section 179: End of Year Equipment Purchases
Section 179 of the US Internal Revenue Code allows businesses to lower their current-year tax liabilities by taking an immediate deduction for expenses related to equipment, vehicles and other depreciable assets. Small businesses often choose to take this deduction over the more traditional approach to capitalizing and depreciating purchased assets over time as a way to obtain more immediate tax relief.
Claiming the Section 179 deduction for any given year requires that the equipment be purchased, in service and available to use by December 31. You don’t necessarily have to use the equipment by then, but it does have to be “plugged in,” and ready for use. There are also limits to the size of the deduction, which is currently set at $1,160,000 as of 2023.
To properly leverage Section 179 to reduce your tax bill, it’s important to make a business decision first. It will only defray the cost of the equipment you purchase, meaning you’ll still be stuck with most of the cost of the equipment after taking the deduction. Make sure you consider your needs and whether purchasing the equipment would make sense and consult your CPA before making any big purchases. It may prove beneficial to buy this year, but it may also be beneficial to wait until January to make the purchase. It all depends on your situation and your strategy.
Bonuses, Profit Sharing and Retirement
Compensation, retirement and benefits for your employees (and yourself) are some other impactful tax-saving opportunities to consider as the new year approaches. Do you want to pay out bonuses to your employees before the end of the fiscal year or at the beginning of the new one? Do you have a retirement plan in place? Are you satisfied with your current plan, or would you like to get something more robust? Have you instituted a profit-sharing system? If not, do you know the potential benefits that you might realize if you do?
Many of these compensation-related considerations may seem expensive or unnecessary at first blush, but you may be surprised at the counterintuitive, surprisingly lucrative potential that seemingly impractical plans hold. Take retirement plans for example:
If you have a retirement plan in place but aren’t having enough withheld to maximize the contributions for the year, you may be losing out on both the immediate tax deduction for the year and the potential tax-deferred growth that contribution may have otherwise realized.
Retirement plan rules require you to contribute to eligible employees’ accounts based on metrics like how much they defer into the practice’s plan and their salary. We tell clients that if they’ve maxed out their own retirement contributions, they’ll have to max out their employees’ contributions — which may seem expensive, but the numbers usually end up in the client’s favor. For example, if you contribute $50,000 to your account, you may have to fund about $10,000 across your other employees’ accounts for a total of $60,000.
Not only will you be pocketing $50,000 in the future, but you also will have accrued a combined $60,000 tax deduction. That shakes out to a deduction that has more than paid for the amount you put in your employees’ accounts. There’s similar math behind profit-sharing arrangements: providing the expensive benefit can generate tax savings that more than pay for the program.
Enlist the guidance of an experienced, professional CPA to crunch the numbers, take emotion out of the equation and help you make the decisions that are right for your business.
Don’t Count Out Creative Tax Planning Tactics
Like clockwork, end-of-year financial news headlines often advertise “quick” and “savvy” ways to slash your tax bill heading into the new year. It’s true that there are several little-known (and potentially obscure) tax strategies that can help you secure greater savings; but the key is to closely follow applicable IRS rules and only implement them with the help of a qualified CPA.
For instance, take the topic of familial compensation: If one of your colleagues or peers told you they put their children and spouse on their payroll and suggested you do the same, chances are your first emotion-informed response would be something along the lines of, “Did I hear you correctly? That doesn’t sound like a good idea.” Contrary to what you may think, employing family members in your practice can be a profitable tax strategy — but only if you execute it correctly and in an IRS-compliant manner.
Provisions in the tax code and precedent set by court cases stipulate that business owners may put their children over the age of 6 on their payroll. Not only can children legally earn up to $13,850 per year tax-free, but the practice can also deduct their wages, as their employer. By doing this, you can essentially shift money from your higher tax bracket to your child’s 0% tax bracket.
Of course, children can’t be paid for nothing; they must be employed in some reasonable capacity, and you must assign them jobs they can actually perform. That means you can’t hire them to do X-rays or perform oral surgery, and you can’t pay them $1,000 an hour to sit in the waiting room — but you can pay them a wage that’s comparable to entry-level employees or interns who perform data entry, clean the office or organize office supplies.
If your partner or spouse isn’t employed somewhere else, you may consider giving them a position on your staff as well. Since your partner or spouse presumably won’t have an active retirement or health plan, employing them is a great way to provide both benefits while also increasing your family’s overall income. Best practice dictates paying them just enough to maximize their retirement contributions, but the actual pay rate should obviously depend on their qualifications and the services they provide your practice.
Just Scratching the Surface
This list is far from exhaustive, and there are other potentially-lucrative strategies (such as cost segregation) that you can possibly employ to help reduce your tax bill. But the options above provide a solid starting point to increase your deductions and put you in the best-possible tax position next year and beyond. If you’d like to know more about these strategies or other tips for proactive tax planning, schedule a consultation with Aprio’s skilled team of dental professional advisors.
Make 2024 your best tax year ever. Reach out to your Patterson territory representative and find out how Aprio can help secure your practice and your legacy.
Thomas Prevatt, CPA, is a Partner at Aprio, where he serves as a tax advisor to professional service businesses and owners, including dental practitioners. Leveraging his deep and extensive technical tax expertise, Thomas helps owners make informed decisions that increase profitability, growth and value.
Tom Stowe, CPA, is a Partner at Aprio, where he works exclusively with dental practice owners and associates nationwide. With more than 30 years of experience in the accounting industry, Tom’s specialties include strategic tax planning, practice benchmarking and dental practice profitability consulting to accelerate business goals and manage risk.