As you know, my goal for the Progressive Dentist Podcast is to bring you strategies and wisdom that can help you keep more of what you make. There are virtually countless deductions and ways to legally minimize your tax liability, and too many practice owners are paying the IRS more than they have to in taxes each year.
On this solocast episode of the Progressive Dentist Podcast, I share with you a great strategy that can help you claim up to a 20% Section 199 deduction on your taxable income, if you make between $315,000-$415,000 in taxable income in a year, and I offer strategies to help you maximize that deduction to help save you thousands of dollars. I also discuss a few more of the common mistakes dental practices make on their taxes that can really add up.
Section 199, A Powerful Deduction
In 2018, a new deduction was carved out in the tax code to help small businesses such as S-Corps, LLCs, sole proprietorships and partnerships get the same kinds of tax advantages that bigger C-Corps are able to take advantage of. Section 199 is divided into two parts, Qualified Business Income, and Specified Service Income. Dentists, doctors, attorneys, CPAs, and other professionals fall under the Specified Service Income part of Section 199, and it allows you to claim up to 20% of your taxable income as a deduction.
If your taxable income for the year is $315,000, you can take the full 20% deduction. The deduction scales down until it becomes zero at $415,000. One of the strategies you can employ if you’re within this range or if you’re just beyond the $415,000 upper limit is to look for ways to reduce your tax liability over the course of the year so that you can claim a larger percentage of the deduction. The key is to speak regularly with your tax professional and work together throughout the year to find tax savings. If you only start thinking about these things when it’s time to file, you’ve probably missed many opportunities to reduce your liability and take advantage of Section 199.
One potential way to legally reduce your tax liability is to put your kids on the payroll. Tax laws allow you to employ your children as young as seven years old, although I generally recommend you wait until they are around eleven. Paying them an appropriate wage for their work and then putting their earnings into a Roth IRA will allow you to use their income as a business expense and help reduce your taxable income. Smart strategies like this one can be the extra push you need to bring your taxable income down to take better advantage of the Section 199 deduction.
Avoiding Mistakes by Checking In With Your CPA
As I have stressed many times over the course of the Progressive Dentist Podcast, it is critical that you speak with your CPA many times throughout the year to look for ways to reduce your taxable income. Especially before you make any major purchases or financial decisions, you should always talk to your CPA to see if there are better ways of doing things that can save you money.
For example, let’s take a look at goodwill. Goodwill is the difference between what you pay for practice and the fair market value of the assets you’re buying at the time you purchase the practice. The example I gave during the episode is this: say you purchase a dental practice for $1 million, and the fair market value of the assets being purchased total $400,000. That means you have generated $600,000 in goodwill, which can be amortized over the course of 15 years, which works out to about $40,000 a year in amortization. Not amortizing goodwill and other basic mistakes like this can cost you thousands a year in taxes, which is precisely why it is important that you consult your CPA early and often.
I hope you enjoy this short and sweet episode of the Progressive Dentist Podcast, and I hope it shows you why it is so important to be thinking about your taxes and ways to save money all year long. As always, please visit me at www.theprogressivedentist.com for more informative, money-saving podcast episodes like this one.