Tax Deductions You Don’t want to Miss with Dr. Howard Farran

Howard: So we’re at five. What’s five?

Craig: Five. Mistakes. Oh god. Missing a home office. Okay. Let’s just say you’re a young dentist. You’re new in a practice. You own your practice, or you’re being paid on a ten ninety-nine, which probably shouldn’t be. And you’re doing all your administrative work from home. Okay. The government says you could take a home office deduction. So let’s just say that room that you use only for your business is ten percent of the square footage of your home. You can now write off ten percent of your home expenses such as the utilities, your maintenance, you can even do your real estate taxes and your mortgage interest. And people say, ‘well, that doesn’t really help’.

It does help when it comes to alternative minimum tax. And the other thing that allows you to do is it allows you, if you have a gym in your home, to write that off as a home athletic facility. If you have a pool it allows you to write that pool off as a home athletic facility, as long as it’s available for your employees and their families and if you are an employee, that’s you. So, that’s the home office.  Home office also allows you to deduct the travel expense between your home and your primary place of employment or your multiple places of employment. So, those are things… and they all add up.

Howard: So probably if you’re listing this and you’re twenty-five to thirty and you’re working for corporate dentistry or you’re an associate in some office. They’re always wondering in the back their head, ‘gosh. I’m paid a straight employee. If I owned the practice I’d have a lot more taxable things I could do. I’d have more deduction’. So if she’s sitting in her car right now and she’s thinking this question, ‘Craig, if I actually own my practice, how much more deductions would I get in my current situation where I’m an employee?’

Craig: Whole lot more. A whole lot more.

Howard: Will that be enough to make you swing from being an employee dentist, as an associate to being a dentist practice owner?

Craig: Most definitely.

Howard: Knowing what you know about the tax code.

Craig: Yes.

Howard: Would that swing you from being an employee to an owner?

Craig: Most definitely. And that’s the reward the government gives you for going out there and taking those risks.

Howard: Right. So, you got ten. You’ve done five.

Craig: Another big one is choosing the wrong business entity. How are you operating? Did you just decide to open this business or buy this practice and went to your attorney and he said, ‘okay, form an LLC or form a corporation’.  What thought went into it? And sometimes it can make a big difference as far as the taxes you pay whether you’re an LLC, you’re a sole proprietor. Okay. You’re a corporation or an S corporation. And fortunately if you do choose the wrong entity, a lot of times there are opportunities to make what we call late elections in my world and change the way that entity itself is taxed. So that’s a big one.

Howard: So who… who should make that decision? Is that… is that a CPA like you or is that a lawyer… who usually makes that decision?

Craig: Ultimately in the best… the best case scenario is have the business owner, the attorney, and the CPA have a conversation about that, and choose what works out best. Because obviously you want the liability protection but you also want the best tax… tax way to go.

Howard: Okay.

Craig: So fortunately we can make some changes there a lot of times, and make the correction without jumping through a whole lot of hoops.

Howard: Alright. So what’s seven, eight, nine and ten?

Craig: So we got… let’s see. We have taken the wrong… wrong retirement plan or no retirement plan. So sometimes they’re taking a… they’re using a SEP,  sometimes they have a 401k, sometimes they have no plan at all. And these days it’s a great way to attract good employees because they want a retirement plan. 401k’s are easy to set up and not going to cost you a lot of money. You can figure all that out in advance. And a young dentist can put away eighteen thousand dollars a year. So that’s one.

Another thing, depending on the type of entity, there’s something called a Medical Expense Reimbursement Plan that you can have. Where, depending on how you’re set up, you could write off all those out-of-pocket medical expenses that normally are not deductible.

We have hiring your family. Okay. The court actually says… Supreme Court ruled you can hire somebody as young as seven years old to work in your business. Now, I’m a bit conservative, so I like to start at eleven or twelve. And let’s just… let’s just say little Johnny… little Johnny’s going to private high school and it’s costing near five hundred dollars a month. So if you pay that out of your pocket you don’t get any deduction for it, but if you have Johnny come in. And he works a couple hours on Saturday, maybe a couple hours during the week. You pay him. It goes into his bank account, you get a deduction for that.  And then the school drafts his checking or savings account every month for the five hundred dollars. You just turned that expense into a deduction. Now, one kid is six thousand. Three kids is eighteen thousand.

Howard: I think the minimum wage law and they not working until 16. I think it’s the most cruelest thing ever. I go back to my childhood. Everybody like my daddy owned a restaurant. I worked there since I was ten. My best friend John Leas worked there since he was ten. And now we’re both dentists. And we thought school was boring, and we thought working at Sonic Drive-in evenings and weekends was the most fun of our life. But you’re with adults. You’re with managers. You’re with employees. You’re with the customers. You’re making change. And to sit there and… same thing if your dad was a dairy farmer he hired you and your buddies and they were baling hay.

And you always had jobs, and you always had income. And then those poor kids who, maybe they’re a single family, maybe it’s just your mom and she doesn’t own her own business. And you come home from school and you’re not allowed to work from age ten, eleven, twelve, thirteen, fourteen. So what do they do? They get bored, they get into trouble, they start smoking pot, whatever the hell… if you think it is absolutely criminal that a fourteen year old kid after high school got a job at Subway, you’re just… you’re insane. I think the smartest business people that come out of dental school, and the dentists who do the most successful, their parents either owned a dental office, owned a farm, owned the business. The kids I worry about the most was the mom and dad were employees and they just… they walk out of school, and they don’t have the first inkling of an idea the culture of what it means to own your own business. And to not want to share that with a kid is criminal.

Craig: Right. It’s a great learning experience and I mean I think back to my time. I mean ten years old, where I was, you had a bicycle and you had a paper route.  Okay. Now you wouldn’t let your kid out at six o’clock in the morning on a bike riding around the corner. So times have changed and there are no jobs out there unfortunately for kids, so it’s tough. But hiring your kids and hiring relatives is a great way to do it and you can make certain things that are not deductible. Well, you could actually turn them into deductible expenses.

Howard: What number was that? Was that eight?

Craig: That was probably… let’s just say it was eight. Let’s talk about… what we talked about missing car and truck expenses. Missing meals and entertainment. Are you taking people out? Are you entertaining them? Okay. That’s fifty percent deductible. Or are you providing meals in office for your staff? If you’re doing it under certain circumstances you can deduct the whole cost of the meals and entertainment.

YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.

Get your free copy of my book Ten Biggest Mistakes That Cost Business Owners Thousands.

Listen to the full podcast here.