The Home Office and Other Deductions on The Navigating Dental Insurance Podcast

All right. Home office alone doesn’t give you a huge deduction, because some of that stuff you’re writing off all ready, such as your mortgage interest and maybe your real estate taxes. But, you get to deduct a portion of your utilities. But the big thing it does is now, if you spend the right amount of time in that home office, which is around 14 hours a week. It’s considered by the IRS a bonafide home office, now anytime you go to your other place of a business, might be where you actually operate in the chair, that travel is deductible. Right?

Oh, awesome.

That’s cool, because I have a home office, and I have an office in another city where my employees meet as well. So, I can deduct my travel?

Yes, as long as it’s a bonafide office in your home. The other thing it does, which is even better than that is, it allows you to have what they call an on-premises athletic facility.

Oh, nice.

That’s for the use of your employees and their families. That could be a home gym, or it could be a pool.

I’m getting a pool.

Me too. I was just thinking that. Upgrading and selling this house and going to buy a bigger one with a pool and a gym. That’s cool.

That’s pretty cool. No idea.

Those are two of the ones that are interesting, the gym and the pool are really cool, and the tax code says you can do it.

What about a hot tub? I want a hot tub.

If it’s a pool and it’s for the use of your employees, yes.

Can your spouse be an employee then?

Yes, she can.

If she’s not like a stay at home mom, and you can use the child employment strategy. Of course, they come and contribute with the business. My wife helps me write articles.

Yeah. My wife does too.

I don’t pay her right now. I haven’t ever paid her, because she kind of owned all the money anyway. You know how that goes. But you could use that strategically, right Craig?

Right, and now she’s doing work for you, so let’s just say you have a 401K plan, all right? So now you pay her $20,000 a year and she puts 18 of that into her 401K. Even though you still have to pay FICA tax on that, which is about 15%, we find most of our clients when they do that, that they save about $3,500 a year anyway, after all the FICA taxes, etc.

Great. Another question that comes to mind … This is something we hear after that one year that Mitt Romney was running against Barack Obama, and Mitt Romney’s tax returns came back and I think he paid in the range of 10 to 13%. Back then a lot of people were like, well, how do we get the Mitt Romney tax? Do you remember that Craig? Do you recall?

Yes. I’m old enough to remember that.

That was like only four years ago.

I don’t think I know of that. I wasn’t born yet.

So, somebody that says, how do you gain access to the Mitt Romney tax, how does that actually work? How come he was taxed at such a low amount, legally?

Because he had acquired so much wealth that most of his income was coming in the form of capital gains and dividends, which are taxed at a lower-

Like passive income from real estate, like rental properties, things like that, right?

Capital gains is taxed at a lower rate, than if you were W2’d?

Correct. Long-term capital gains on income like your stock, or stock in his companies that he owned, or stuff like that, or dividends from those companies.

Yeah. That actually sounds like a good idea, Jordon. We need to look into that because-

It’s essentially dividends.

Essentially if you’re living off of the dividends of the businesses that you own, you’re taxed in that category, right?

Lets just think about it for me and you, okay? In order, if you own your own company, in order for you to have dividends to pay, you have to have income. That income on that corporation depending on where it is, is taxed around 39%. It’s kind of not a good strategy for your own business, maybe, but if you have a huge, very large stock portfolio, that’s where it really helps out.

I see. Owning like 20 different businesses, or at least having partial ownership in them, that type of tax strategy would work better, is what you’re saying?

Right. It could work better, yes.

Okay.

Wait. Oh, go ahead, sir.

Typically, that’s a corporation. That’s a very large corporation, and they’re paying their own tax, and then they’re dividending out income to their shareholders.

OK, I see.

Not a closely held corporation that me and you might be thinking of.

Gosh, the government will get their money either way, sounds like.

They’ll find out.

Yeah. They’ll find out how to tax you and they’ll get the money.

I have a question that I’ve been thinking about quite a bit about taxes. I’ve been thinking about buying rental properties. Is there a way that my business could use that as a write off to buy those properties, or is that just out of the question there?

When you buy real estate, typically we recommend it being held in a separate entity anyway. God forbid something happens. You don’t get to depreciate that piece of real estate the way you would normally depreciate a piece of equipment. Where if you spend $50,000 on a piece of equipment, you could write the whole thing off the first year. That doesn’t normally work with real estate. But, there is stuff that when we have clients that are buying real estate, typically let’s talk about residential real estate. It’s depreciated over 27 and a half years. One thing we’ll recommend is, we’ll recommend maybe what we call, cost segregation study. That allows you to take more depreciation upfront. You get the deduction sooner, that dollar in your pocket today is worth a lot more today than it is in 27 years. You want to look at the different things you can do if you own real estate.

Yeah. Very interesting. That’s something.

With a lot of dentists, they own the building. Then you want to make sure that’s being done correctly.

So typically, would a dentist if he owned his own building would he set up a separate LLC for his own building, or whatever entity he is recommended?

Typically, yeah. From an asset protection side, that makes a lot of sense. Rental income is not subject to self employment tax, so it doesn’t hurt you there. Then you just gotta make sure that you’re depreciating it the right way, and you’re taking advantage of what you can. We’ve seen a number of mistakes even when it comes to that, where they’re generating a loss in their piece of real estate, had a big gain in their regular dental practice, and they’re not allowed to take that loss in the piece of real estate. When legitimately if they made a certain type of election, they could take that loss.

What’s the election? I just heard this the other day.

It’s basically treating it like, even though it’s two separate structures, you’re making an election to treat it like they really are one operating entity.

Okay. That makes sense. Awesome. Go ahead and ask.

Craig, there are three main things that you focus on tax planning, certified tax coach and then the CFO services. We haven’t even talked about CFO services or that CFO aspect of growing a business. Can you explain what that is and how that would benefit practices, because looking at it from the perspective of a small business owner, the question in my mind becomes, at what point in the business do you need to have a CFO? A CFO in general, a full time, or part-time CFO, and what is the role of the CFO in terms of growing the business?

Most dental practices aren’t going to need a CFO. They need a proactive CPA, tax preparer, tax accountant, but they don’t necessarily need a CFO until they get to the point where maybe they have multiple practices. At that point you could justify a CFO. But what we do with some of our dental clients is, we’ll take … I don’t even want to call them mini CFO services, but we’ll take care of some of the accounts payables and stuff like that for them. We’ll set them up with a system so it makes it real easy for the dentist to pay bills and stuff like that, so he doesn’t have to worry about writing checks. It’s almost like he logs in. He checks a box off, and he authorizes a bunch of bills to get paid. Then he doesn’t have to look at it until next month. That’s a service we build in to with some of our clients.

That’s pretty cool. I’m personally very interested in this because knowing what I’m going to have to pay in taxes here in a couple of weeks. Just the CFO aspect of the business, I don’t need a full time CFO now, but gosh it would be sure nice to have somebody that would come and look at the numbers and help us coach, and help us figure out strategies for growth. But, the whole planning aspect of the business financially is something that I think is lost in a lot of small business owners that don’t have the revenue to hire full time people to help with money. Controllers and things like the that big businesses have. This is pretty interesting.

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