Getting More Money Out of Your Practice
Capitalize on tax laws to maximize deductions and credits
Bobbi A. Stanley, DDS
During her first year of dental practice, Bobbi A. Stanley, DDS, received a call from her certified public accountant (CPA) on April 14—the day before taxes were due. "He told me that I owed a huge chunk of money," she says. "At the time, it was more money than I had actually taken out of my practice in income that year." Stanley, a master of the Academy of General Dentistry with a private practice in Cary, North Carolina, was bitter at first but quickly turned her attention to ensuring that this never happened again. "I decided that I needed to be doing more to look out for my practice as a business owner, so I started exploring tax law," she says. She attended continuing education (CE) courses, subscribed to newsletters, and consumed any tax-related content that she could find online. In addition, she hired better advisors and asked them questions on a regular basis. "Even 30 years later, I continue to work closely with good advisors because the tax laws change every year," says Stanley, who now teaches her own CE courses on the subject. Recently, Inside Dentistry spoke with Stanley about some of the most important tax issues that she has encountered.
Inside Dentistry (ID): How much money can the average solo practice really save by doing a deep dive on its taxes if it has not done so previously?
Bobbi A. Stanley, DDS (BAS): Practices can potentially save thousands, but trying to put a number on it is impossible. The problem is that all dentists are spending money for business purposes, but many do not realize that some of those expenditures truly count as business expenses for tax purposes.
ID: How much time should a practice owner be devoting to tax issues?
BAS: Every dentist should have advisors, but my opinion is that dentists should also be educating themselves about tax deductions and tax credits. Obviously, if you attend at least one CE course per year that addresses tax preparation, you will be updated on the latest changes to the tax laws. In your practice, paying proper attention to the details that have tax implications is not difficult. All practice owners record the money spent in their practices; the key is correctly categorizing it for the tax expense. For example, prior to the COVID-19 pandemic, the laws specified that some meals were eligible for a 50% tax write-off whereas others were eligible for a 100% tax write-off. Many dentists simply put all of their meals into the first category only, and thus, they were getting 50% tax deductions for all of them. They did not realize that they could get 100% write-offs for certain types of meals, such as catered food brought in for their teams or meals bought during business trips.
ID: You mentioned learning about deductions and credits. What are the key differences?
BAS: Any time that applying a tax credit is a possibility, it is a wonderful thing because a credit is dollar for dollar. If I have a tax credit for $50, I can take $50 of income off the bottom-line amount on which I have to pay taxes. Alternatively, a tax deduction is only a percentage of your tax category; if you have a 100% tax deduction and your tax category is 40%, you only get a 40% tax write-off. Therefore, a tax credit is much better than a tax deduction.
ID: We know deductions are more commonly available, however, and one area to which they apply is vacations. Should a dentist ever need to take a personal vacation again?
BAS: There are three ways that an otherwise personal vacation can be written off as a legitimate business expense. The first involves visiting a colleague, which can be done anywhere—not just in his or her hometown. For example, if you want to take a trip to The Bahamas, you could have colleagues meet you on one of the islands and have a business meeting there. Of course, it needs to be a legitimate meeting. You cannot go to the Bahamas to hang out with your dentist friends and call that a business meeting; you really need to have a business meeting about dentistry. Let's face it, though. Dentists talk about dentistry all the time, so when we get together with colleagues, that is our topic. Just make it official.
The second option is already clear to most dentists—you can write off travel for CE. Fortunately, in dentistry, CE is available at many great resorts, so that is a really easy way to take a vacation that you can expense. Just find a location where you want to go and search online for CE courses in that area. You'll acquire CE when you go to the meeting, but you can also have a great vacation there.
The third way to write off a vacation as a business expense is less familiar to many dentists. We all have legitimate businesses, and a legitimate business is required by law to hold a corporate meeting at least once per year. Personally, my tax advisors have advised me to hold meetings quarterly. A yearly corporate meeting entails sitting down with your board of directors to discuss the future of the business, and if you're the sole owner of a private practice, your board of directors can include anyone you want. In my case, all of my adult children, my son-in-law, and my husband are on my board of directors. We can hold a corporate meeting in Park City, Utah, and spend the rest of the time skiing. Just remember, like in the first example, a legitimate meeting must be held. Corporate meetings can be held anywhere in the continental United States as well as in a lot of places in the Caribbean and Mexico. Tell your tax advisor where you want to go, and he or she can confirm whether you can have a corporate meeting there.
ID: On that note, can dental practice owners employ their own children?
BAS: They definitely can, and I advise all of them to do it. You need to abide by state laws, which vary from state to state, but employing your children offers a great way to not only help instill a work ethic in them but also take money out of the practice without needing to pay taxes on it. There is a defined level of income that your children can pull out of your practice without needing to pay federal and state taxes. This year, it is $12,950.
So, what can your children do and at what age? Technically, any child aged 6 or older can work. They can come in the office and sweep, shred papers, and perform other simple office tasks. When you pay them, the amount needs to be appropriate. People have asked me, "Can I pay my child $1,000 a week to come in and sweep once?" The answer is no. Their employment needs to be legitimate in that the amount you are paying them roughly equates to what you would pay someone else to do that same job. People have also asked me if they can pay their children to be models for photographs to be used on the practice's website and in the office, and the answer to that is absolutely yes. Again, however, you can only pay them at the rate that you would pay a professional model. You need to obtain that information, even if it means calling a modeling agency and asking how much it would cost to hire a model for a day, getting it in writing, and keeping it in case you get audited.
The key to maximizing all of these and other tax deductions is to categorize your business expenses appropriately and maintain all of the proper documentation. If you get audited, you will have all of the records, and there should be no problems. I find that dentists are often scared to take tax deductions because they fear getting audited. The truth is that they are already highly likely to get audited because the Internal Revenue Service (IRS) looks closely at small businesses that make a lot of money, which dental practices do. There is no reason to be afraid of an audit, especially if taking more deductions will significantly reduce your tax liability; just make sure that you have the appropriate tax records.
ID: How can a dentist write off a company car?
BAS: Dentistry is a business. Every practice owner is running a small business, and every business needs a car to handle business-related travel, such as going to the bank, going to stores for office and other supplies, and taking business trips. Even driving to and from your office can be considered a business write-off in certain categories.
You can write off a company car in one of two ways. You can either maintain a car that is exclusively dedicated to business activities, or you can maintain a car for which you write off the percentage of the mileage that is used for business. From my experience, that first option is an immediate alert for the IRS, and if you are writing a car off 100% for business but using it to drive to the gym, then that is a problem. Figuring out what percentage of your car's use is for the business and then writing off that percentage is the preferred strategy. A great way to do that is with a smartphone application. There are many available that automatically record each trip and allow you to swipe one way for business or the other way for pleasure.
Some friends of mine who are practice owners have told me that their CPAs refuse to write off their business cars because they are dentists, and that is totally ludicrous. I recommend that anyone in this situation change advisors because any CPA who thinks that a private practitioner does not run a business should not be advising dentists. We are all business owners, and all of us should be able to write off legitimate business expenses.
ID: What do people need to know about the R&D tax credit?
BAS: The R&D tax credit is a popular trend that many dentists are getting on board with because companies are encouraging them to do it. This can be a great option, but only if you legitimately qualify. Just being a dentist and owning a milling machine does not entitle you to the R&D tax credit. Some dentists have gotten a lot of money from this tax credit, but those who claim it need to be careful because the IRS is noticing, and they can—and will—audit you and insist that that money come back if your qualifications are not deemed legitimate. If you are truly doing something that constitutes research and development—for example, you are using a 3D printer to really home in on how to fabricate better implant surgical guides to deliver better dentistry-then if you get audited, you can explain it and be fine. If you are developing a new technique in dentistry or you are the first in dentistry to incorporate some type of technology into a procedure, that is absolutely considered research and development. However, if you are just doing what every other dentist in the country with a milling machine is doing, that is not considered research and development. I believe that you need to be very careful with this distinction. My tax advisors have compared the R&D tax credit to conservation easements that many people have claimed in the past. Some of those people are now being audited, and many are having difficulty justifying the claims. You really need to follow the tax laws closely and ensure that you have a legitimate cause when you claim any type of tax credit or deduction.
ID: Are there any potential pitfalls to utilizing the Section 179 tax deduction for purchasing qualifying equipment?
BAS: In my opinion, Section 179 is a gift from the government to small business owners. It allows us to deduct up to $1 million in qualified purchases in one year, which enables large tax savings. This applies to purchases, leases, and financed equipment. It is important to remember that if you plan to utilize a section 179 tax deduction for a given year, the items/equipment must be purchased, installed, and in use before December 31 of that year; otherwise, they do not qualify for that year. That means that if a doctor is planning to make a large purchase that he or she wants to write off in the current year, he or she should consider making it by October or November at the latest or earlier if implementation will take longer.
ID: What are some other creative ways to get tax-free money out of your practice?
BAS: One that a lot of people do not know about is that you can use your practice to rent your home for a brief period. A home can be rented to any business for up to 14 days with the money being tax-free, and the business can write it off as rent. So, how do you do that legitimately? We discussed corporate meetings earlier. You can certainly have a corporate meeting in your home and write that off. How much can you write off? Every year, I call the nicest hotel in town and ask how much it costs to rent their boardroom for the day. I get that in writing and file it with my other tax audit information. If the IRS audits me and asks why I paid myself that specific amount per day for my house, I can respond that I hosted a corporate meeting there, and I can provide the minutes from the meeting as well as proof of what it would have cost me to rent a nice hotel's boardroom for the same meeting. It is a legitimate business expense. In addition, if you host a team party or retreat at your house, you can also pay yourself rent for the days that it takes to set up before and clean up after. The cleaning expenses can be covered by the business and deducted as well. If you have a vacation home, you can certainly do the same thing there. Again, you just need to have all of the documentation, and it can only be for up to 14 days. If you rent your home for 15 days or longer, the rental income is considered taxable at that point, and even the first 14 days would be taxed.
When appropriately documented, there are so many expenses that are tax-deductible that business owners are unaware of. I teach a 2-day course on the subject. We even discuss education and houses for your children, weddings, and more, but that gets very complicated, and you need a really good tax advisor to set those things up. I will leave you with one more notable tax-deductible expense that I have found to be popular with many dentists: luggage. Luggage needed for business travel is a 100% tax write-off, and dentists have to travel often for CE courses. My luggage includes a briefcase to carry my computer, which is often a large Chanel or Louis Vuitton bag. That is a legitimate tax write-off. The government does not place a limit on how much I can spend on that tax-deductible expense. As long as it was purchased to be used as luggage for business purposes and categorized as such, a nice bag is a legitimate tax write-off. You can even purchase nice luggage or a bag for your spouse if he or she is on your board of directors or employed in your business, which I believe that every dentist's spouse should be. It's your business—don't be afraid to run it your way and claim your business expenses.
Disclaimer: Inside Dentistry and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to be relied on for, tax, legal, or accounting purposes. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.