The Top 3 Tax Mistakes Dentists Make
By: Derick Van Ness
Tags: Dentist, Business, Small Business, Finance, Taxes

If you are a dentist and you haven’t drastically changed your tax strategy in the last 3 years, then I can almost guarantee you are overpaying TENS of THOUSANDS of dollars each year.

I know that’s a bold statement. But I am committed to telling you what you NEED to hear, and sometimes the truth ain’t pretty.

So here’s what you need to know…

The tax code has changed several times in the past few years (the PATH Act in 2015 and the TCJA [Tax Cuts and Jobs Act] in 2017), and both have made changes that immediately and drastically impact dentists in particular.

So if you haven’t made changes to go along with these 2 major updates, it’s been costing you. Period.

So what can you do about it?

I’m going to share 3 of the biggest tax mistakes I see dentists making so you can keep a LOT more of the money you make each month!

NOTE: I am NOT a CPA and this is not tax advice. I work with a team of CPAs and this is based on what we see with our dental clients, so please check with your tax professional to determine what is right for you. If you want a second opinion, our team will be happy to help. You can reach us HERE!

Mistake #1: You are Not Filing for Research & Development Credits.

This is HUGE for Dentists, and before you dismiss this, hear me out.

Before 2015, R&D credits weren’t an option for dentists. So if your tax pro told you they don’t apply to you, that has changed. The PATH act, combined with some legislation in recent years, opened up R&D credits to businesses that couldn’t file pre-2015.

Dentists are in the group that can now receive credits & refunds.

Before 2015, it wasn’t cost-effective for your tax pro to file for R&D (and other) tax credits because it cost too much and the rules changed every year. Not anymore. In 2015, R&D credits became a permanent part of the tax code, enabling specialty tax firms to begin filing them cost-effectively.

What that means for you is that R&D tax credits are now on the table, and they are worth tens of thousands per year.

On Average We’ve Seen Dentists Get a $50–75k Refund

My firm has already helped dozens of dentists file, and on average we’ve seen a $50–75,000 refund when we look back 3 years (that’s about $20k per year). Also, that is $50–75k PER DENTIST, so if your firm has multiple partners, the aggregate will be much higher.

One last thing to note on this…

Your regular tax person or CPA won’t be able to file this for you. R&D and other credits are a specialty niche, so 95% of tax firms don’t file them. You’ll definitely want to use a specialty company so that this gets done easily and correctly.

Bottom line, if you don’t do anything else in this article, figure this out. I’ve never seen a dentist turned down for these credits, so there’s almost certainly “free money” waiting to be claimed.

Photo by Kelly Sikkema on Unsplash

Mistake #2: You Don’t Understand IRS Section 199A or QBI (Qualified Business Income)

Section 199A is a code that was part of the Trump tax rewrite in 2017, so it’s new and a LOT of tax professionals aren’t paying attention to it. For many businesses this may not matter, but this often applies to dentists.

If your taxable income is near $157,500 (as an individual) or $315,000 as a married couple, you need to PAY ATTENTION to this one.

If your income is below that amount, you get to deduct 20% of your qualified business income (QBI) plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

What does that mean for you?

If you’re anywhere near the benchmark income of $157,500 or $315,000, then you want to do everything you can to fall BELOW that number and get the 20% deduction.

This obviously needs to fit with your other tax strategies, but if your tax pro isn’t talking about this, then you need to talk to someone who understands and can optimize it for you!

BONUS: If your taxable income is significantly higher than the benchmarks ($400,000+), then there are other specialty tools and alternative investments that can be powerful in creating tax savings and efficiency. Feel free to reach out to us HERE if you’d like to know more about those…

Photo by Frank Busch on Unsplash

Mistake #3: You are Taking All of Your Income as Salary.

This is not something new, but I see a large portion of dentists making this mistake and it’s very costly.

As a business owner, you have the right to take some of your income as dividends/distributions as long as you aren’t actively involved in creating that income. The advantage of this type of income is that you can avoid the self-employment tax of 7.5% on those dollars.

Obviously, you can’t take all of your income as dividends, but you only NEED to pay yourself a salary equivalent to what it would cost to have someone replace you as a “dentist” in the business. The dividends are effectively what you make for being the “business owner.”

As a simple example, if you pay yourself $250,000 per year and were to take $150,000 as salary and $100,000 as dividends, the dividends could save you $7,500 in taxes that year. If you make more than that, this little change in how you pay yourself could be significantly more!

Summary: What Can You Do About It?

Any of these tips could be worth tens of thousands of dollars per year, so they’re worth understanding. In fact, these tips alone could pay for your kids’ education or help boost your retirement savings immensely.

Even more importantly, these are only a few of the mistakes we see dentists making with taxes (and financially). In fact, on average, we see that our Dental clients are overpaying $11,300 per $100k of income. So if you’re making $200k or $300k, then you’re likely over paying by double or triple that amount.

Bottom line: Be sure you’re working with more than a CPA, you need a pro-active tax pro. If you’re tax person isn’t actively giving you ideas on how to save more taxes, then it might be time to upgrade, and a good tax pro is worth their weight in gold so it’s worth the time!