As most of you have probably heard, President Trump signed the Tax Reform Bill rolling out some of the largest Tax Reform since the Reagan Administration. The key question is how will this impact dentists operating their own practice and/or working as Independent Contractors.
Dental Practice and Dentists working as Independent Contractors are considered Businesses providing Professional Services.
Impact on Income Tax
Most dentists will see their income tax rates decrease 1%-2%. However there are many dynamics at play, for example if you have children and dependents, you no longer get exemptions which were used to lower the overall tax owed.
If you are single and you did not itemize your deductions in the past you will see a bigger standard deduction this year ($12,000 for vs $6,300 for 2017 ).
Each scenario will be different, as we do tax planning throughout the year we will look for opportunities that will maximize the return.
Section 199A Business Tax Deduction
Under the new law businesses now get a 20% Tax Deduction. This is huge! However before we get excited there are specific restrictions on businesses that perform “professional services”, such as dentists. (By the way Accountants are in the same bucket so we feel your pain.)
The Rules (Summary and Simplified Version)
**The Pass Through Deduction is 20% of net qualified business income. (Lesser of the 2 calculations Below)
- 20% of the Tax Payers Qualified Business Income
- Greater of 50% of the W2 Wages Paid Out or the sum of 25% of the W2 Wages paid plus 2.5% of the value of all qualified property.
But Not Greater than:
- 20% of Taxable Income
Here is the kicker for Dentists.
If you are Single and your Business Income is less than $157,500- you may qualify for the full deduction. For Income between $157,500 and $207,500, the tax deduction is reduced in a linear manner. if your over $207,500, than the deduction is zero. So if your a single contractor that earns $150k a year and we run payroll for your S Corp of $60,000 per year- You could get a $30,000 tax deduction, which is a little over $5,000 in tax savings. Huge! However if you earn $215,000 a year you get nothing.
For Married the Limits are – under $315,000 income for you and your spouse- you qualify for the deduction. Over $415,000 for you and your spouse- You get zero.
With most dentists earning more than these limits, it will be a challenge to get this extra tax deduction.
Corporate Rates Dropping to 21%. Should Dentists switch to C Corporations?
The quick answer is no. C Corporations may have lower tax rate than most successful dental practices, however remember C Corporations are taxed twice. The second tax which is in the 15% range pushes the total tax paid up over the current S Corp Structure.
Forward looking Tax Planning Tips
- Property Tax Deductions will be limited in 2018. Prepay 2018 Property Tax in 2017 to get the deduction now.
- Charitable Deduction maybe limited due to the higher standard deduction in 2018. Prepay Charitable Contribution for 2018 in 2017, if you commonly itemize, and your itemized deductions are higher than standard deduction for 2017. (Over $12,700)
2018 Tax Planning
If you are part of our accounting and tax planing package, we will advise on how much estimated tax payments should be for 2018, based on the new rules. Based on individual circumstances, we will advise on opportunities to lower your taxable income if you are close enough to the lower range, to qualify for the 20% Business Tax Deduction.
Thank you and we hope you have a Happy New Year!
Here’s to your best financial future ever!
Written by Omar Virjee, CPA. For more information on our services, please feel free to contact one of our Dental CPA team members by calling 713-396-3172 or emailing omar@virjeeconsulting.com
