New Tax Laws and Small Businesses
An early overview for dental laboratory owners
The following is based upon the dental laboratory owner as the member, shareholder, or proprietor of a business defined as a pass-through or small business (such as an S corporation, LLC, or LLP) and not that of a public company. Effectively, the owner or owners report the taxable income from this type of entity on their personal tax return and pay a tax at their personal rate. The new law for the dental laboratory owner with this type of enterprise is that there may be an additional 20% deduction from its net income granted prior to the owner paying a tax. This point at present is a little confusing based on the owner's tax filing status and the definition of what the net income is.
In the coming few months, attorneys and accountants will understand more of the intricacies of the law and be able to augment it to assist the owners of small to medium-size dental laboratories. It is also not a business enterprise known as a C corporation, or another in which the profits remain in the company unless withdrawn by salary, dividend, or another type of withdrawal and its profits or losses are not reflected on the personal tax return of the owner or owners. The C corporation, for those dental laboratory owners who have one, will have its effective tax rate reduced from 35% to 21%. This is all very preliminary and every dental laboratory owner should discuss the new law with his or her own accountant since each business has its own idiosyncrasies.
Since these tax changes are new and very numerous, there are many things that will occur once the IRS begins assessing and implementing the new law. Upon an audit, the IRS will look for ways to keep taxes as high as possible, while innovative accountants and attorneys will approach this as an opportunity to explore concepts not previously available for tax concessions for the small business owner, including the dental laboratory owner. At first glance, it appears as if the dental laboratory owner will enjoy at least one benefit not available in the past. As previously mentioned, this is the right to deduct the 20% of whatever the pass-through net income of the dental laboratory reports, before taxes are computed. This deduction would occur before the dental laboratory owner determines his or her personal income tax. This leads one to believe that all business expenses should definitely be reported through the dental laboratory, if at all possible, prior to its reporting of net income.
Other Material Amount Deductions
Based on the understanding that each dental laboratory owner's CPA determines the company's ability to write off improvements to real estate, a 100% deductible expense may be earned from the renovation of the dental laboratory. This deduction has been typically available for new equipment and has allowed the dental laboratory owners to acquire or lease state-of-the-art technology and equipment, use conventional financing, and take the 100% expense in the year the equipment was put in service. The payment could be over any negotiated term and rate that was agreed upon with the lender. The concept with the equipment was and is a wonderful partnership whereby the government and the dental laboratory owner shared the cost of the equipment as the dental laboratory owner reduced his or her income tax very quickly. The preliminary indications are that now any type of permanent leasehold improvement or real estate ownership enhancement involving spending money for upgrades will allow the same type of quick tax deduction. This is supposed to be a 5-year program, where the benefit will phase out for these kinds of improvements that were previously written off over many years. Accountants and attorneys will be advising dental laboratory owners to put these renovations in place now and, taking advantage of these large write offs, to have the relief on a present value basis of the tax savings today and not over the long term as previously allowed.
The deductibility of residential mortgage interest will be limited to the interest on the first $750,000 of the amount of the mortgage. An innovative thought to consider might be to use the dental laboratory for financing and to withdraw up to the amount needed to reduce the personal residential mortgage to the maximum of the $750,000 loan on which the interest is deductible. The dental laboratory owner's CPA can assist with questions of basis, deductibility of the loan interest to the dental laboratory, and the economics of whether it makes sense for each dental laboratory owner to do something like this. It is not for everyone. Real estate taxes, state and local income taxes, sales tax, and other types of this kind of tax will be limited to a maximum of $10,000 for the year on a personal basis. It may be time for a reassessment of the value of the house to see if those real estate taxes can be reduced. If faster depreciation on leasehold improvements to the dental laboratory can occur, that will reduce the taxable income of the dental laboratory and therefore reduce the state and local income taxes due that are based on the taxable income reported to the IRS. Many state and local governments compute their taxes from coordinating the federal taxable income to their local and state tax structures. Once again the dental laboratory owner's CPA or tax attorney can assist in determining if this is a good approach for the owner based on the overall financial structure of the dental laboratory.
Meet Now with Personal and Business Advisors
Since the recent law was just passed, it is important to get a head start with the dental laboratory's advisors to determine what to do and when to do it. A good approach is probably to have the same advisors on a personal basis as those who advise the business. Many concepts that may assist the owner on a personal level may be in conflict with the dental laboratory and vice versa. The coordination of all facets of the law should be analyzed for the most advantage available.
Editor's Note: Look for more details on the new tax law and laboratories in IDT's August 2018 issue.
Tax Disclaimer: Inside Dental Technology 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 provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
About the Author
Bruce Bryen, CPA, CVA, is Principal of Robin Kramer & Green, LLP, in Fort Washington, Pennsylvania.