By: Drew Hinrichs, CPA, CEO of Engage Advisors
Here is our top 20 list of tax deductions. See how many you’re taking, and if there are some you’re not, but should be.
1-Tax-Deferred Retirement Plans: Only one-quarter of dentists max out all the retirement account options available to them. Remember, every dollar you put into a tax-deferred retirement account won’t be taxed this year.
2-Healthcare: Health insurance is expensive, but at least you can pay for it with pre-tax money. Your health insurance premiums could be a deductible business expense, as are the contributions to a Health Savings Account that you can use for co-pays and deductibles.
3-Business/Operating Expenses: If you are a sole proprietor, partner, or contractor, keep records of all your business expenses because most are deductible, including office equipment, supplies, medical equipment, licensing fees, communication expenses, board exam fees, etc. The main benefit of being an owner, rather than an employee, is that you can get to take all these deductions which offsets having to pay the employer portion of your payroll taxes, which are also deductible.
4-Depreciation in Real Estate: For dentists who own business real estate, cost segregation allows an accelerated depreciation from 39 years to as few as 5 years on those retail or rental properties. Through a cost segregation study, a property is broken down into components such as furniture, carpeting, landscaping, and sidewalks, each with its own depreciation rate. Getting a cost segregation study isn’t difficult to do and the tax benefits can be significant.
5-Home Office: Practice owners spend a lot of time on things like responding to emails, paying bills, reviewing charts, etc. It’s the kind of work most dentist prefer to do from home, and by having a dedicated home office that’s only used to conduct the business of your practice, you are eligible to deduct a portion of your mortgage interest and utilities expenses.
6-Car Mileage Deduction: You’re not allowed to deduct travel to and from your office at the beginning and end of the day, but you are allowed to deduct all travel that occurs during the day. If you stop at your home office in the morning to check your email or review your schedule, you can then deduct the mileage to and from your clinic. Over the year, those miles add up.
7-Qualified Business Income Deduction (QBID): The Tax Cuts and Jobs Act (TCJA) passed in 2017 established a new tax deduction for business owners of ‘pass-through’ businesses, including sole proprietorships, partnerships, and S corporations. Self-employed dentists can qualify for this deduction, which is a 20% deduction of business income, though this is subject to income fadeout.
8–S-Corporation Salary: Make sure you have reviewed and considered what amount should be taken as salary vs. profit as an employee-owner of your practice. Significant savings in payroll taxes are possible with the proper review and reporting.
9-Meal Expense: The COVID-19 Relief Bill increased the deduction for business meal expenses from 50% in 2020, to 100% for tax years 2021 and 2022. The higher deduction is meant to bolster the restaurant industry.
10-Child Tax Credit: The Tax Cuts and Jobs Act (TCJA) doubled the child tax credit to $2500 per child under 17 years of age, and further amendments under the Biden administration have increased that to $3500 for taxpayers meeting certain criteria. There have been changes made about future exemptions and deductions as well, so there could be additional deductions for the next tax year.
11-Qualified Business Income Deduction (QBID) for Rental Property: Under the TCJA of 2017, property owners may be eligible for a qualified business income (QBI) deduction for rental income. For dentists who have active rental property or own their practice building, they may take up to 20% of the rental income as a deduction on their taxes.
12-Student Loan Payment Deduction: It’s very common to have student loans for dental graduates. For those paying back debt from student loans, filers can deduct up to $2500 of interest paid for the year. There are income limitations to this deduction that may apply, so it’s best for individuals to discuss their particular situation with a financial advisor.
13-Travel: Many practices are set up as a corporate entity with board members that include the owner and spouse. If you fall into this category, you are eligible to deduct travel costs for you and your spouse for a trip that otherwise would have been considered personal travel. Certain rules apply, such as travel must be within the U.S., but if you hold a board of directors meeting or retreat anywhere within the U.S. the costs of travel and hotel can be deducted.
14-Stock Market Loss: Stock market losses or capital losses can be applied against annual income to reduce the amount of income that is taxable. To get the greatest tax benefit, there are strategies to implement that will deduct losses in the most efficient ways. An individual can claim up to $3,000 if they have any losses from the market, and they can carry forward the remainder of the balance to offset any future income.
15- Membership Fees/Professional Dues: You can write off all the membership fees you pay for on an annual basis, including dues to the ADA, AAP, AOS, etc. Legal and accounting fees are also considered professional fees and thus can be written off as a cost of doing business.
16 – Contribute to Charity: If your itemized deductions, which include charitable contributions, exceed your standard deduction, then the amounts above the standard deduction are tax deductible. You can also donate appreciated stock (or other investments) to charity and are allowed to deduct the fair market value of the shares and avoid paying any applicable capital gains taxes on investment gains.
17 – College Savings Plan Contributions: Not everyone can deduct contributions to 529 college savings accounts, but some states offer a state income tax deduction if you use an eligible state-sponsored 529 plan. If allowed in your state, contributions are only deductible from income for state taxes (not federal), so the tax savings likely isn’t huge, but you might as well take what you can get. Also, like Roth accounts, all money in 529 accounts, including investment earnings, can be withdrawn tax-free if used for eligible education related expenses.
18 – Buy the SUV: Heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment. They qualify for 100% first-year bonus depreciation and Sec. 179 expensing if used for business over 50% of the time. Given the cost of the vehicles, this is a huge tax break.
19 – Review the Rent: If you also own the real estate for the practice (typically in a separate LLC), make sure you review the rental rates and how Medicare and other taxes play into the total picture of rental income. However, if you increase the rent to market rate, it may also provide potential to reduce payroll taxes or to otherwise lower income for the owners of the LLC.
20 – Family Business: Consider employing your spouse and children if there is productive work for them to do. This not only helps the practice, but also sometimes allows income to be taxed at lower rates and for a spouse to contribute to social security and/or retirement savings plan.
If you have questions about how to lower your taxes, Contact Engage Advisors. We’ll make sure your tax plans are up to date and that you’re taking all the deductions you’re entitled to.