What if you were to take the top three tax mistakes that you think Dentists make. What would those be?
Well number one would be failing to plan. Like the guy just says give me a W2 takes into account no planning. What can I do if I am self-employed? What do other businesses do that they’re self-employed? What can they save? So that’s the biggest thing, people spend a lot more time researching what kind of car they’re gonna buy than what type of entity or how they should be structured. That’s the number one thing. We talked about, the wrong business entity. We have maybe the wrong retirement plan, should you have a home office or not have a home office? What can you do with that home office? So when we’re talking about the associate those are some of the some of the big things that pop up.
What about was an owner is there differences in owners?
When it comes to being the owner and the guy that’s the hook for the practice, you have all the improvements that you do. I can’t tell you how many times I’ve seen dentists that are practices and they purchase it and they have this goodwill, that’s an accounting item on a balance sheet and nobody’s ever amortized that or depreciated it or in layman’s terms expense that amortization. Then we have the dental owner that owns the building. Have they looked into using cost segregation to increase the amount that they’re able to depreciate in the earlier years versus the late years? So what’s cost segregation does, is typically the commercial building is depreciated over thirty nine years but there’s equipment in there that might be depreciated over five or seven years so when you do a cost segregation study you break out three-year property, five-year property, seven, ten, fifteen and you depreciate that property quicker which increases your depreciation in the earlier years so the more I could save today the better off I am down the road.
Gotcha. What about just adding equipment? I’m always curious, some guys seem like clockwork every year they’re putting a little bit of something in and trying to keep it up and you got other guys that just will skip equipment for awhile and then do this huge big remodel with a one-time big, big expense. Is there any advantage one way or over the other?
If you buy equipment every year that means you get to write off more every year. There’s a couple of different ways to depreciate equipment. You could depreciate it all at once under certain codes, you could depreciate it over a number of years or you could depreciate it under something that’s around temporarily called bonus depreciation so you have to look at your numbers and see what makes sense at the end of the year where do you get your biggest bang for the dollar.
Any difference between doing a lease versus buying when it’s equipment, is there any tax advantage one way or the other?
Typically when you see a lease in the dental practice its leased to buy or lease to own so it’s a small buyout at the end so it’s out it it’s struck later the same way as if you purchased it.
Gotcha would you–do you think dentists overpay in there taxes/
Yes I definitely think that they overpay on the taxes. Not purposefully, they won’t –they don’t want to overpay but for most CPAs most accountants, tax planning is in December and figuring out how much am I going to—or what’s that estimated payment I need to make by January 15th. That’s what most people consider tax planning whereas what we like to do is, we look forward and we see what we can do a little bit differently and generate those tax savings. And communication is key, that doesn’t just happen in December you got to work throughout the year.
Is there any restriction? I mean we’re in South Dakota I’m guessing you’re in New York; can you work across state lines? Does it work that way and CPA’s or do you have to be licensed in each state or how does that how does…
We have we have clients across the country. Obviously you need to be aware of the different rules in each state which varies slightly but I have a network of people throughout the country. The only thing you need to be licensed to do is if you’re going to audit or review a financial statement that’s where you have to be licensed by that state.
Gotcha, which doesn’t come into practice that often. Well give us a few proactive tax planning things. Like what can we do as a dentist to be proactive about planning for our tax liabilities?
Well you need to communicate. Let’s see what your salary is we use a reasonable compensation study to see how much time you’re spending in your practice, how many days a week you’re working, what are you doing during that time and breaking that out to see what reasonable compensation is because if I could take that money and that’s not subject to FICA tax and save fifteen percent of that even if it’s twenty or thirty thousand dollars, and some money I keep it’s also not subject to the net investment tax. Do I do work from home should I have a home office? Can I write off part of my home expenses? So if you have a room that takes up five or ten percent of your home and you’re doing all your administrative tasks from there that means you get to write off 10% of your utilities 10% of your maintenance. Yu get to write off your 10% of your mortgage and 10% of your real estate taxes which doesn’t sound like a big thing except for when it comes to alternative minimum tax. Real estate taxes, depending on your state you’re in are an add back for alternative minimum tax so sometimes it helps to move that to the front of the page versus the back of the page.
Explaining again so you would say that the home office is in a–it’s a percentage of the square footage, is that how you how you figure it?
Yes, you have a room that you use that makes up 10% of the square footage of your home use that for administrative stuff you don’t, you know, watch TV in there you don’t you know entertain in there, then you get to deduct 10% of those expenses of operating that house on your tax return and normally we set up what we call an accountability plan to take care of that and what that is that’s we figure out what the number is ahead of time. At the end of the year you need to provide those receipts for the checks that you’ve received so it’s deductible to the business and you don’t have to pick it up as income on your personal return.
All right now I’m asking for a friend. I’m asking for a friend, say a friend had bought a Snowbird winter house in Scottsdale and it had a nice home office and they had a–they owned a group practice and they did the admin for the group practice out of that office while they were snow birding in Scottsdale. Is that–does that still fall under that? I mean how does–is he tracking the right way there?
Oh definitely for the time period that he’s down there, it counts. I’d have to look to see whether the time that if he’s if he spends six months there or does he spends three months there does he spend the whole year there? Well you know if South Dakota winters are pretty long I’ve asked a friend that’s something that I would research to make sure that if you took the whole hold full 12 months it was you know it would pass the sniff test. We always want to pass the sniff test.
Yeah because the–I think there’s a six-month thing because say this friend practiced in a state that had no state income tax and Arizona does have a state income tax. One wouldn’t want to go over that residency line you know for the state that had a stated tax.
Oh no you don’t want to get tripped up by that now.
Yeah I know, I was just asking for a friend.
A friend on East River South Dakota
How many dentists get jammed up in tax problems?
I would say the same amount of dentists get jammed up in tax problems as a typical business owner out there, and it’s typically the tax problems come down to payroll taxes and not using a payroll service or falling behind in the taxes for the payroll service. That’s the typical one that we see.
That’s probably–and I could definitely get that. You know I remember years ago, when I did all that, you know it’s easy to forget a quarterly form or something that you know is automatically provided to you but you know when you use one of those services. Are there any payroll services that you recommend? Or your firm probably does those themselves, is that correct?
We recommend a number of different–you know we–from the big boys to the small local ones it comes down to a matter of preference. What you’re looking for. In that business you kind of get what you pay for typically.
Those are all legal problems you find. What are the one of the ethical problems that sometimes arise from taxes?
Well if you if you’re doing things and you’re writing things down that are not correct then you have an ethical problem.
I mean what’s the number one example for a dentist in that realm that you see?
Not accurately tracking what their expenses are. That’s it and then kind of flying by the seat of their pants at the end of the year so when we work with a client we work with them throughout the year so that doesn’t happen. And more often than not when people fly by the seat of the pants they’re actually under calculating what their expenses are versus over.
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