Tom Bodin, a Practice Integration Advisor with Buckingham Strategic Wealth, works with dentists to help them achieve financial freedom through a comprehensive approach to wealth management.
As a small business owner, you have opportunities to deduct expenses for income tax purposes that an employee of a larger organization cannot. When CPAs and financial planners sell their services to dental practice owners, the pitch often comes with some version of a promise to exploit personal deductions in the practice to minimize tax liability. Take these broad promises with a grain of salt, because if the IRS comes knocking at your door, it will be your responsibility to justify these deductions. While the near-term benefit of saving a couple hundred, or even a couple thousand, dollars in taxes in any given year sounds appealing, failing an audit by the IRS comes with significant expenses and likely will cost more in the long term. In addition to the monetary costs of an IRS finding, the emotional toll can be heavy as well. An audit by the IRS is disruptive and intrusive. Approaching an audit with limited confidence in the outcome only compounds the stress and disruption.
With that warning in mind, there are still several personal deductions that you may be able to take advantage of when preparing your taxes:
Automobile expenses: You cannot deduct the mileage you rack up to and from your practice. This is considered commuting mileage and it is disallowed. However, you can deduct any trips you take for the benefit of your practice within the day. In addition, certain automobile use to travel to CEs, study club events, and meals that have legitimate business purposes (for instance, dinning with referral sources) are allowable. Several apps are available that offer easy mileage tracking, making this an easy deduction to utilize.
Travel expenses: Many associations and study clubs provide destination CE events. These can be great business trips, perhaps also involving some personal fun. However, the goal must remain to meet CE requirements, learn new clinical skills, and more efficiently run your practice. Such trips can create a deduction and concurrently provide useful knowledge. On the other hand, I once saw a “top tax tips for dentists” article that suggested a practice owner could write off the entirety of a family vacation simply by stopping off at a colleague’s practice and taking the colleague to dinner, essentially allowing that practice owner to deduct a week’s worth of personal fun. That will not fly with the IRS. A portion of your trip may be deductible due to the business nature of a certain day or event, but do not get greedy.
Family as employees: Ghost employment will always result in an audit finding. However, there are several ways that your family can provide legitimate services to your practice. If you have children, you likely provide dental care for them. If appropriate, you can hire your children as models for your practice. Hang your children’s pictures in a prominent place, usually the practice’s waiting room and hallways, and compensate them a modest amount for using their likeness. (But make sure they are smiling! I have a 17-year-old son, and I know from experience that this isn’t always the easiest thing to do.) When this strategy is combined with a well-thought-out college savings plan, you can receive a near-term tax deduction for your children’s modeling work and a long-term tax benefit through funding a 529 plan. If you do not provide clinical services to your children but they are of an age to supply janitorial services (that is, light cleaning or landscaping and other custodial chores), hiring them in this capacity represents another viable opportunity. Finally, spouses are often heavily involved in practice administration. This does not only have to be a labor of love! If you have a non-dentist spouse who assists with back-office and administrative functions for the benefit of your practice, he or she deserves to be compensated. In addition to staff cost increases that do not significantly erode household income, this arrangement can offer allocation benefits in conjunction with a properly designed qualified retirement plan.
Retirement savings: Dental professionals have opportunities to save for retirement in a tax-efficient manner through custom qualified retirement plan designs. These plans are tied to the practice, so their administrative, staff and planning-related costs also are deductible in the practice. A properly designed qualified retirement plan and its accompanying expenses can provide many thousands of dollars of tax savings every year.
Practice-related financial planning: I would be remiss not to acknowledge that the cost of financial planning services (such as Buckingham’s own practice-integrated wealth management), or similar services that focus on practice cash flow management, can be deductible.
You may hear that the IRS has decreased field staff in recent years and that near-term, frequently minimal tax savings are worth pushing the envelope. They are not. If you have questions about the deductibility of specific expenses, ask your accountant. If you are unsure of or uncomfortable with the response, ask that those expenses not be included in your practice’s return.
Taxes are a necessary expense for all dentists and business owners, but you can work to mitigate your lifetime tax burden through your clinical years, during transitions, in retirement, and in achieving your legacy goals. Large tax bills are a product of a profitable practice. Pay no more than what the government is due, but also do not cross the line and invite greater financial and emotional stress.
If you have any questions about this topic, please don’t hesitate to reach out. Buckingham Strategic Wealth’s Practice Integration Advisors would be happy to help answer them.