How does tax reform affect dentists, their practices?
February 12, 2018
Washington — The recent tax reform bill passed by the government is the first major rewrite of the U.S. tax code in over 30 years and is packed with changes that could affect dentists' financial planning.
ADA News asked the president of the Academy of Dental CPAs to see what the Tax Cuts and Jobs Act means specifically for dentists beyond the revised standard deductions.
Allen M. Schiff is the president of the academy, which is made up of 26 dental CPA firms representing more than 9,000 dental practices. Mr. Schiff lectures on all subjects relating to dental practice management, especially those revolving around taxation.
"As a result of this major change in tax legislation, dentists should be meeting with their dental CPA as early as possible in 2018 to start the tax planning process," Mr. Schiff said. "There are many aspects of the new tax legislation that will impact them."
Q: How would the tax reform affect dentists?
A: Beginning Jan. 1, individual dentists are now allowed to deduct up to 20 percent of qualified business income that passes through from a partnership, an S corporation, or a sole proprietorship. In essence, the dentist that has a pass-through entity will only be taxed on 80 percent of their pass-through income.
Qualified business income is the net amount of qualified items of income, gains, deductions and losses with respect to the qualified trade or business — such as dentistry — of the taxpayer.
If your taxable income is $315,000 or less and you file a joint return ($157,500 filing single), then you are able to take the 20 percent deduction of pass-through entity income. If your taxable income is between $157,500 and $207,500 (single) and/or $315,000 and $415,000 (married filing joint), then there will be a phase-out of the 20 percent deduction. The benefit of the deduction decreases as income increases.
If your taxable income is $415,000 (married filing joint) or greater ($207,500 filing single), then there will be no 20 percent qualified business income deduction.
Internal Revenue Service Code Section 179 allows business owners to deduct the purchase price of equipment and/or software put into service during the year. Section 179 depreciation expensing limits have been raised to $1 million per year, with a spending cap phase-out starting at $2.5 million of equipment purchased in a given year. This became effective on Jan. 1. Bonus depreciation, which was 50 percent, increased to 100 percent for any equipment acquisitions subsequent to September 27, 2017. This includes both new and used property acquired. Consult with your dental CPA on the specifics of depreciation and bonus depreciation.
Q: What should dentists in general know about the tax reform changes, including how it relates to their personal finances?
A: Here is a quick reference guide for dentists to consider:
- Medical expenses can now be deducted for 2017 and 2018 calculated as an itemized deduction in excess of 7.5 percent of the taxpayer's adjusted gross income. Previously, it was limited to 10 percent of the taxpayer's adjusted gross income.
- An existing home mortgage would retain the $1 million mortgage interest limitations. After December 15, 2017, the deduction is limited to a mortgage of $750,000 or less. For 2018, home equity loan interest is no longer deductible.
- Under the new legislation, the deduction for all state and local taxes combined cannot exceed $10,000. These taxes include state and local income, sales, real estate or property taxes.
- Commencing in 2018, miscellaneous itemized deductions are no longer deductible. These would include tax preparation, investment advisory fees, unreimbursed business expenses, safety deposit rentals, et cetera. Dentists may want to ask their dental CPA if their dental practice can now pay these expenses and deduct them accordingly.
Q: Are there questions dentists should ask their accountants?
- Do I have the correct taxing entity as we enter 2018?
- What changes can I implement now, so I can benefit from the 20 percent pass-through deduction?
- If I have an S corporation, what is the reasonable compensation you would recommend?
- If my practice operates as an LLC, what should my guaranteed payment be?
- Does it make sense to elect to use Section 179 depreciation for 2018?
- Should I consider electing out of the bonus depreciation for 2017 and 2018?
- If I have debt on my practice, should I consider bonus depreciation and/ or Section 179 depreciation?
- Does it make sense to title my automobile in my practice's name and depreciate it accordingly?
Q: The new tax law lowers the corporate tax rate to 21 percent from 35 percent, a large reduction. Is it causing S corporations to reconsider whether they should convert to being taxed as C corporations?
A: As a result of the reduction of corporate tax income tax rates, I would still advise to not place the dental practice into a C corporation. The reason for this: double taxation. If you leave profits in your C corporation, you will save taxes going from 35 to 21 percent. But, you will be paying an initial tier of tax at 21 percent. If in the future, if you would like to withdraw the funds retained in your C corporation, you can accomplish this in one of two ways: salary check as a bonus payroll or pay a dividend to yourself. As you can readily see, you will pay taxes within the C corporation (21 percent) and when the funds are withdrawn as a dividend or a salary, you are taxed a second time at your individual tax rate.
Q: What about dentists who have plans to sell the company in the near future? What should they know?
A: If a dentist is thinking about selling his or her practice in the near future, my recommendation is they start the planning process now. Besides practicing as a dental CPA, I am also a dental broker. What we inform most sellers is that it could take up to one year to sell your dental practice. If this is the case, you have plenty of time to do the necessary tax planning, but please start the planning now and not put it off.
Q: Does tax reform mean that there will be different ways to run a business?
A: If you are operating as a sole proprietor, an S Corporation or an LLC, you are in a great position to benefit from this new tax law as a pass-through entity. The opportunity I see is for those of you who are working as an associate is to consider operating as a pass-through entity as opposed to as an employee. You would have to form a pass-through entity in order to gain the potential benefit of this strategy. Please also remember the income limitations as mentioned above, because if you exceed them, I would just stay the way you are — as a W-2 employee. Also, please consult with your dental CPA, because the Internal Revenue Service has taken on a big initiative for the abuse surrounding whether you are an employee (W-2) or an independent contractor (pass-through entity).
Q: Are there any changes regarding student loan interest deductions?
A: After threats to ax the deduction, the deduction has been retained. The student loan interest deduction allows you to deduct up to $2,500 of student loan interest directly from your taxable income. For 2018, the student loan interest deduction will phase out when your modified adjusted gross income is $65,000 filing as a single taxpayer and $135,000 filing as married filing joint. It totally phases out at $80,000 (single) and $165,000 (married filing joint).
Q: Has the alternative minimum tax exemption changed?
A: Alternative minimum tax is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as an exemption). This exemption is substantially higher than the exemption from regular income tax. The AMT's purpose is to ensure everyone pays a minimum amount of tax. The alternative minimum tax exemption for 2018 has been increased from $55,400 for single filers to $70,300 and joint returns from $86,200 to $109,400. My opinion is that the number of taxpayers subject to AMT in the future will dramatically decrease, as a result of the increase in the AMT exemption.
"The new tax law is very complex," Mr. Schiff said. "We as dental CPAs are waiting for further guidelines to be issued by the Internal Revenue Service. The Academy of Dental CPAs is currently studying all aspects of the new tax law. We discuss it daily and are always looking for ways on how this new tax law will be of benefit to our clients."
Updated tax tables are available at irs.gov.
Q: Is there anything else that dentists should know that would shed some light on what is happening and what they can expect in the future?
A: In the future, because of the increase in the standard deduction (married filing joint - $24,000), you may not be in a position to benefit by itemizing your deductions. If you find yourself in this position, you could consider paying two years of medical expenses or charitable deductions in one year as opposed to spreading it out over two years.
If you use your automobile for business purposes, the new tax law has increased the business vehicle depreciation. Below is the allowable automobile depreciation for 2018 and beyond, assuming you are using the vehicle 100 percent for business purposes:
Year no.1 - $10,000.
Year no. 2 - $16,000.
Year no. 3 - $9,600.
Year no. 4 - $5,760.
If you are currently leasing your business vehicle it may make more sense for you to consider purchasing your auto than to continue leasing a vehicle for tax purposes. Please be sure to consult with your dental CPA.
Beginning in 2018, business entertainment expenses incurred for recreation or amusement, including tickets for sporting events, will be disallowed. Business meals provided for the convenience of the employer are now only 50 percent deductible whereas before they were fully deductible.
In addition, for tax years beginning after December 31, 2017, the domestic production activities deduction — intended to provide tax incentives for businesses that produce most of their goods or work in the United States rather than sending that work overseas — is repealed. This applies to practices that are using computer-aided design and computer-aided manufacturing within their offices.
"The new tax law is very complex," Mr. Schiff said. "We as dental CPAs are waiting for further guidelines to be issued by the Internal Revenue Service. The Academy of Dental CPAs is currently studying all aspects of the new tax law. We discuss it daily and are always looking for ways on how this new tax law will be of benefit to our clients.”
For more information on tax reform and the work of ADA Advocacy, visit ADA.org/advocacy.
The information in this piece is not intended to be, nor should it be construed as, tax, accounting or legal advice. Readers are urged to consult a qualified professional when seeking such advice. The ADA makes no endorsement of the above advice, nor of any website or organization mentioned in the above piece.