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Mid-Year Tax Planning Strategies

Fourth of July has come and gone, and with that marks 6 months left in the year. This is an important time to focus on income tax planning to ensure you are legally paying the least amount of taxes you can. Calvin Coolidge once said “Collecting more taxes than is absolutely necessary is legalized robbery.” No one should ever pay more in taxes than what is required. Let’s chat about some ways you can reduce your taxes.

Qualified Business Income (QBI) Deduction

QBI is a new deduction that was introduced with 2018 tax reform. In essence, it allows you to receive 20% of your business income tax free, so effectively you are only paying tax on 80% of your net income. This is great, except for specified service trades or businesses, and you guessed it: dentists are included in this group. If you are married filing jointly, the deduction starts to phase out after your taxable income exceeds $315,000 ($157,500 for single filers) and completely goes away after taxable income exceeds $415,000 ($207,500 for single filers). If you are close to or over these thresholds, there could be ways to reduce your taxable income so that you can take advantage of at least a portion of the qualified business income deduction. Note that it phases out using taxable income, which means that you can evaluate other sources of income and deductions besides the business income.

Retirement

You can set up a retirement plan through the business. Doing so will allow you to deduct any employer match contributions that you make on behalf of employees and will also make you a more attractive employer. There are lots of different choices for retirement plans: 401K, Simple IRA, defined benefit plans, and SEP IRAs. If your business isn’t quite at a place that it makes sense to setup a retirement plan, you can always setup a traditional IRA, which will allow you a deduction on your individual return, assuming you meet all of the qualifications to take the deduction. Always consult with a financial advisor when you are ready to start a retirement plan.

Rent Your House

Did you know you can rent your house out no more than 14 days and not have to pick up the income? It does not have to be consecutive days but it does have to be a personal residence. To meet the personal residence rule, the property must be used for personal purposes more than 14 days or 10% of the days rented out, whichever is greater. This tax strategy allows the business to pay out rent and take the deduction, while shifting the cash flow to the practice owner, whom once again does not pay tax on the rent income. There are lots of caveats with this strategy. First, you cannot use this if you are a Schedule C, sole proprietor or single-member LLC. Secondly, the rent has to be based on fair market value. Finally, there has to be a documented business purpose, such as hosting a business meeting for employees or shareholders or hosting a holiday party for your staff.

Accelerated Depreciation

For many years now, we have been able to take accelerated depreciation either via Section 179 or Bonus depreciation. Whenever your practice purchases a new asset (like dental equipment or furniture), the IRS requires that you depreciate the asset by spreading the cost over a certain amount of years. However, accelerated depreciation allows you to write off the cost in the first year. The new rules under tax reform are much more favorable towards accelerated depreciation. With Section 179, you can write off 100% of an asset, but you are only allowed to write off $1,000,000 and can only be used on purchases up to $2,500,000. Section 179 also cannot create a loss for tax purposes. Bonus depreciation allows you to write off 100% of an asset and has no thresholds. So, if you know you are in need of a new piece of equipment, you can claim the deduction which will reduce your taxes, and it will also help reduce your taxable income to get you closer to the qualified business income thresholds discussed above.

Charitable Donations

If you still itemize under tax reform, luckily there were not changes to charitable donations. If you are charitably inclined, this is another great tax strategy to help reduce your taxable income closer to the qualified business income thresholds. If you think you may itemize one year but not the next, you can also “bundle” or “bunch” your donations in one year to take full advantage of all of the donations in one year. There are also donor advised funds that allow you to take an immediate tax deduction for the amount you contribute to the fund. Then, the fund disburses funds over several or many years to the various charities of your choice. The funds are invested for tax-free appreciation as well.

Entity Structure

This is one of the most important tax strategies you need to look into this year if you haven’t. There can be significant tax savings simply by converting from a Schedule C to an S Corporation, or by converting from an S Corporation to a C Corporation and vice versa. Your specific facts and circumstances as well as your projections for future years impact what entity is the best choice for you. And, now with the qualified business income deduction that passed with tax reform there is even more to evaluate. The C corporation tax rate was reduced to 21% when tax reform passed, which can make it a more attractive candidate as well. Once again, consult with your CPA and your financial team to determine what the best fit is for you.

There are so many ways that dentists can minimize their taxes, so make sure you don’t leave money on the table! If you’d like to know more, please reach out me at: caroline@adamshaycpa.com.

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