March 27, 2023
5 Tax Tips for Dental Practice Owners
Tax season is upon us, and the American Dental Association has advice for dentists who own their practices. We are taking those tips a step further by outlining how maximizing tax advantages can affect your dental practice’s valuation when it comes time to transition ownership. Here are some considerations you can make now and in the future. (And remember there’s no shame in filing for an extension to make sure all your bases are covered at this point.)
Gather all documents
This includes W-2s, IRS Form #1099, IRS Form #1099 Interest and IRS Form #1099 Dividends. It could also include itemizations, such as stockbroker annual statements, cryptocurrency transactions and IRS Form #1098 mortgage statement, according to the ADA. Likewise, interest on your loan payment can be written off as a deduction. Consider taking out a longer-term loan with lower payments to increase the cash flow of the practice, similar to taking out an insurance policy.
Check your receipts
The ADA advises that in addition to gathering their tax documents, dental owners should also make sure all financial transactions within the practice have been accounted for before filing, including receipts and disbursements, such as payroll, any depreciation of any equipment, and amortization of goodwill. Goodwill — non-categorized assets, like status within the community, practice name, staff loyalty and longevity, and brand awareness and marketing — can make up as much as 80% of your dental practice’s value.
Be aware of deductions
Besides the typical tax deductions, like dental supplies, lab fees and employee payroll, you can also include new equipment purchases, continuing education and new owner startup costs in this bucket, depending on how your business is set up (employee, sole proprietor, S-corporation or LLC). The right business structure will not only impact how the business pays taxes, but also how the dentists are compensated. What’s more, while all assets depreciate in value over time, Section 179’s Depreciation Schedule allows you to depreciate all assets up to a certain amount in the first year so that no taxes will be paid, in most cases.
Consider using a dental accountant
As part of your team of advisors, a dental practice broker has all the connections that know the ins and outs of the dental industry. The Academy of Dental CPAs recommends taking the time to interview candidates and ask about their expertise and experience working with dentists. However, when owning your own dental practice, it can feel natural to take accounting and legal responsibilities into your own hands. If considering a transition of ownership in the next year, dental service organizations (DSOs) have departments that handle payroll service, tax preparation and other managerial responsibilities without having to involve the owner of the dental practice. Either way, if this time of year tends to cause a lot of stress and headaches, dedicate some time to improving your record-keeping practicing, including choosing the right cloud-based software for your dental practice, so you can avoid those annoyances next year.
Give back to the dental community
You could certainly donate a certain percentage of your profits for a tax write-off at the end of the year to a cause near and dear to your heart, but choosing to partner with one particular organization will leave a lasting impression on those involved. By attaching your name to a nonprofit, you receive the added bonus of name recognition within the community and those it serves. It’s a win-win for your dental practice and the charity.
Whether you’re in the process of a transition or deep into business ownership, contact the experts at Professional Transition Strategies to learn what tax advantages you might be missing out on and how it all affects your dental practice’s valuation.