Year-end tax planning for dentists
If you find yourself asking your CPA for tax planning ideas in March and April when your corporate and personal tax returns are due, you will most likely have missed the bus when it comes to the most beneficial tax moves. True tax planning happens before year-end when action can be taken to implement strategies to save you money. Here are some tax saving moves to consider as we near the end of 2017.
Set up a home office to be used regularly and exclusively to perform the administrative functions of your practice. This will allow you to deduct a proportional amount of otherwise non-deductible personal expenses such as property insurance, utilities, repairs or rent. By doing this your home office may qualify as your main place of business which will allow a deduction for travel back and forth to your practice which otherwise would be considered a non-deductible commuting cost. Have your practice reimburse you for the calculated costs of your home office.
Have your practice reimburse you for the business use portion of your auto expenses. In order to take a deduction for your auto expenses you must track your business and personal use of your auto. However, if your business travel can be shown to be consistent throughout the year you may track your miles for a certain period (we recommend three months) and apply the business percentage to the rest of the year. There are some smart phone apps that will make this task much less painful than it used to be. You can be reimbursed by using the standard mileage rate (53.5 cents/mile in 2017) or the business portion of actual expenses.
If you purchase a new auto in 2017 you may be able to take advantage of accelerated depreciation of up to $11,160 in the first year. The amount increases to $11,560 for a new truck. If you purchase a truck or SUV that weighs greater than $6,000 lbs you may be able to take a first-year deduction of $25,000 plus bonus depreciation of 50% on the remaining cost. Both deductions are limited to your business use percentage which must be greater than 50%. By correctly implementing a home office you will increase your chances of meeting this 50% requirement since the miles to your practice each day will be business miles.
Section 199 Deduction:
If you utilize a CAD/CAM machine to create in house crowns for your patients you may qualify for a special manufacturing deduction worth up to 9% of net income generated from the production and placement of the crowns. This represents an additional deduction for costs you have already incurred.
Accelerated depreciation on equipment:
Equipment purchased in 2017 is eligible for a first-year section 179 deduction of up to $500,000. Bonus depreciation of 50% is also available. This can allow you to recover all (or a large portion) of the cost of new equipment in the first year of purchase. Be aware that if your practice is set up as an S-Corporation there may be basis limitations that can affect the amount of deduction you can pass through to your personal return and the amount of tax free distributions you can take.
Hire your spouse or children:
If your practice has a 401(k) or another qualified retirement plan hire your spouse through the practice and pay a salary that will enable them to contribute $18,000 to a 401K plan ($24,000 if over 50 years of age). Even greater benefits can be received if your practice operates a profit sharing plan. We can help you determine the most beneficial salary amount for both doctor and spouse.
If your children are of an age that they can help with certain tasks hire them through the practice. If their pay is less than $6,300 they will have no federal filing requirement (state filing thresholds may vary). If you have children in college it may be beneficial to hire them through the practice and have them pay for a portion of their schooling from their wages. If you can earn at least 50% of their total support they can claim themselves and offset all or most of their tax liability by taking advantage of the American Opportunity Tax Credit which will most likely be phased out and of no value on your own return.
If you don’t currently have a retirement we can help set one up and determine which type of plan offers to the best options for your unique situation. By setting up the plan before year-end you will have access to more plan options to allow you to make tax deductible contributions for 2017.
Health Savings Account contributions:
If you utilize a High Deductible Health Plan set up and fund a Health Savings Account. Tax deductible contributions for 2017 can be made of $6,750 for a family and $3,400 for an individual. The contributions are made pre-tax and can be withdrawn tax free if used for qualified medical expenses. Catch up contributions of $1,000 can be made for an individual over 55.
Meals and Entertainment:
Expenses paid for meals and entertainment are generally only 50% deductible for tax purposes. This is because the IRS assumes there is an inherent personal enjoyment being received by taking part in the meal or the entertainment activity. However, there are some meals that are 100% deductible. We recommend setting up two “meal” accounts. Label one account “meals and entertainment” and include meals with customers, referral sources, or one on one meetings with employees. Label the other account “100% meals” and include expenses for in-house staff meals or company parties which are 100% deductible. Separating the accounts will enable your CPA to identify the correct treatment of each group of expenses.
Rent your home to your practice:
If you facilitate company parties or staff meetings at your personal residence have your practice rent your home for the day and reimburse you for the expense. Your personal residence can be rented for up to 14 days per year without you having to report the income on your personal tax return. The expense will be fully deductible to your practice. Likewise, if you use your home to store client records or other files related to your business have your practice reimburse you for the use of the storage space.
The solar credit is one of the best going. At a rate of 30%, the benefit can be viewed like a dollar for dollar deduction for the entire cost of the project. To top it off, the solar credit is allowed against AMT. It just doesn’t get much better. In order to take the credit in the current year the project must be completed before year-end.
Child Tax Credit:
If you pay for childcare expenses for children under 13 in order to allow you or your spouse to work you may be eligible to take a credit for a portion of up to $6,000 in childcare expenses. This credit, unlike most, does not fully phase out as income increases. No matter the amount of your income you can always take a credit of at least 20% of $3,000 in expenses for one child or $6,000 in expenses for two or more. Expenses eligible for the credit are limited to the amount earned by either spouse.
In order to deduct your health insurance payments fully have you practice pay the premiums. Otherwise the deduction may be limited or lost altogether if it is reported as an itemized deduction where your total deductible medical expenses will be limited to the amount in excess of 10% of your adjusted gross income.
To accelerate deductions into the current year prepay your January mortgage payment in December or pay the first installment of your 2018 property taxes in 2017. This is especially effective if you expect your income to be greater this year than next. Beware that AMT (Alternative Minimum Tax) may limit your ability to benefit from prepaying taxes. You should also prepay certain practice expenses, such as office supplies, in December rather than January in order to move the deduction into the current year rather than the next. Any expense placed on a credit card are deductible when purchased rather than when you pay the credit card bill. By putting some of January’s expense on your credit card in December you can accelerate 2018 expenses into 2017 while still incurring the cash outflow in 2018.
Get reimbursed for expenses paid personally:
Be sure to have your practice reimburse you for any company expenses that you may paid out of pocket or with a personal check or personal credit card. Often times expenses are paid personally for the sake of convenience and then forgotten about and never reimbursed.
The end of the year is approaching quickly and, with it, the ability to take advantage of many tax deductions. Act now in order to get the most benefit of the deductions you are entitled to. We are here to help.
David Knittel, Director of Tax, PracticeCFO