Month: May 2023

We’re back!  With another of our Specific Industry articles.  Today we’ll be talking to you dentists about their best money saving tax deductions.  So here goes.

Success in any kind of business really comes down to commitment.  One of the key things you have to commit to is keeping good records of taxable income and tax deductible expenses (money-in, money-out). Running a dental practice has a few little quirks that most other small business types, while available to anyone, dental practices seem to take advantage of the most.  Experience tells me this is the industry, and due to their need for cutting edge equipment. In this article, we will explore the key deductible expenses that dentists can leverage to their advantage.

I. “Normal” Business Expenses are Tax Deductions:

Money spent in the pursuit of more money.  That’s the general rule for claiming deductible expenses.  If you spend money on something that has a DIRECT influence over your ability to make money, it’s probably deductible.  A direct expense would be something like toner for the printer that prints invoices, or coffee to brew a strong cup so your employees are wired as soon as they come to work.  Indirect expenses exist on the fringes and some are deductions.  An indirect expense might be your car which you also drive for personal reasons, or travel to a seminar where you also stay an extra day to visit your brother. Some deduction, some not.  For a dentist, these may include:

Office and Occupancy Expenses:

• Rent and CAM charges for the office.  If you own the building and are reporting as s Sole Proprietor you may be able to write off the mortgage interest, property taxes and Insurance.  If you report your practice income on an entity return (like an LLC or corporation) you should rent the premises to your entity from you personally.  This may open up tax planning opportunities.
• If you have an off site storage facility to store practice items, this is deductible.
• Utilities and maintenance costs for the office space.  This includes your internet access, disposal and sewage as well as gas and electric and telephone/fax lines.
• Office supplies such as administrative materials, paper, toner and envelopes.  The bottled water service you may have is deductible as an office expense.
  

Staffing and Payroll Expenses:

• Salaries and wages for all employees (including yourself if you are reporting as a corporation).  This includes all bonuses and “commissions” paid out.
• Payroll taxes and benefits, including contributions to employee retirement plans and health insurance premiums.  I’ll discuss the various retirement plans available in a later post.
  

Professional Fees and Licenses:

• Fees associated with renewing dental licenses.
• Continuing education courses, seminars, and conferences attended by the dentist.
• Professional association dues and subscriptions to industry publications.
• Practice development costs (Mastermind groups, coaching, marketing programs).
  

Equipment and Technology:

• Costs of dental equipment and instruments, such as dental chairs, X-ray machines, and imaging systems.  If you purchase or lease your equipment, make sure to give your tax person all documentation.  This industry tends to “lease” their equipment, but the lease is really a purchase and should be recorded as a purchase.  This allows you to depreciate the equipment and allows for different tax planning strategies.
• Computer hardware and software used for patient records, billing, and other practice management tasks.

II. Medical and Laboratory Expenses:

You will have outsourced and in house items here.  All are tax deductible.  Some common expenses are:

1. Dental Supplies and Materials:
   • Expenses related to dental implants, prosthetics, and restorative materials.
   • Costs of preventive materials like dental sealants and fluoride treatments.
   • Sterilization and infection control supplies.
   • If you are doing your fabs in house, that’s a 100% deductible item.
     
2. Laboratory Fees:
   • Payments made to dental labs for the fabrication of prosthetic work, such as crowns and bridges.
   • Outsourced dental services, such as denture fabrication or orthodontic appliances.

III. Facility and Operation Expenses:

Maintaining a functional and well-equipped dental facility entails certain deductible expenses:

1. Facility Maintenance and Repairs:
   • Costs associated with office build outs or repairs to the practice premises.  Be sure to properly distinguish between repairs and improvements.  Repairs are deductible in the current year.  If there was a major renovation (not repairs) this is depreciated over 39 years.
   • Upgrades to safety equipment and compliance with health and safety regulations.
     
2. Leasehold Improvements:
   • Expenses related to improving the leased space, such as cabinetry and fixture installations.
   • Flooring and painting expenses to enhance the dental office’s aesthetics and functionality.  I would typically expense painting in the current year.
   • Even amongst improvements, you should categorize properly.  A new wood floor can be depreciated over 15 years while a remodeled bathroom will be depreciated over 39 years.
   • Although not a “tax deduction” in the usual way of thinking, improvements are depreciated over a statutory period so a kind of tax deduction.
     
3. Insurance Premiums:
   • Deductions for malpractice insurance to protect against professional liability.
   • Business liability insurance coverage.
   • Property and equipment insurance premiums.
   • Disability premiums can be reported in a few ways.  If you claim it on your taxes, any disability you receive will be taxable income.  If you don’t deduct the premiums then no tax is due if you receive any payments.

IV. Marketing and Advertising Expenses:

Promoting your dental practice is essential for attracting new patients. Dan Kennedy (a well-known marketing guru) claims “the company who can spend the most to acquire a client, wins”. Dentists can claim tax deductions for various marketing and advertising expenses, including:

1. Website Development and Maintenance:
   • Costs associated with designing, hosting, and updating a professional dental practice website.  I suggest you drive this section.  Don’t let a “web” pro tell you how your website should look.  They are most comfortable creating a brochure site, which is useless and won’t generate any kind of return.
     
2. Print and Digital Advertisements:
   • Expenses related to printing brochures, flyers, or business cards.
   • Costs of online marketing like Google Ads, Search Engine Optimization of your website and any consulting fees you may incur for the management of your website and online campaigns.
   • Don’t forget to include the costs of responding.  A lot of times you’ll see a practice respond by sending out a free item of importance (to the prospect) or some kind of welcome packet.
     
3. Direct Mail Campaigns:
   • Expenses for targeted direct mail marketing campaigns, such as postcards or newsletters.  If you pay someone to create the copy for these campaigns, the copywriter expense is also deductible.
     
4. Promotional Materials and Business Cards:
   • Costs of branded promotional items, such as pens, magnets, or toothbrushes/floss/little tooth care packages.

V. Employee Benefits and Healthcare:

This is typically the largest tax deduction. Another good investment in your practice is your employees.  And without stating the obvious, the better trained your employees are, the more billable work they can do for you.  I’ve never bought the narrative that “I don’t want to spend the money on someone who’s just going to move on to a better job as soon as I train them”.  Seriously.  Make this job the better job.   Dentists can claim deductions for the following expenses:

1. Health Insurance Premiums for Employees:
   • Get a group plan.  You can even offer Dental!  Another option I’ve seen offered are medical reimbursement plans, Health Savings Accounts and Flexible Spending Arrangements (or accounts).  And by making these kinds of benefits available through a cafeteria plan (Sec 125 plans) you even save a little on payroll taxes.
     
2. Retirement Plan Contributions:
   • While the contribution will be made from the employee’s paycheck, any matching funds you make are fully deductible.  For smaller practices I suggest setting up a SEP vs. 401k.  To administer a 401k plan costs thousands a year.  The administration fee for a SEP is usually around $30-50/employee.
   • Husband/wife teams would benefit from a Solo 401k plan.  There is an opportunity to sock away a lot more than with a SEP.
     
3. Employee Training and Education Expenses:
   • As mentioned above, trained employees make you money.  There are so many products and services you can offer, with much of the work being done can be done by a non DDS person (check your states regulations on this one.  I’m in California so those are the rules I know).

VI. Record-Keeping and Documentation For Your Tax Deductions:

You have to do your books.  Monthly.  Weekly even.  If you don’t know how, or necessarily want to do your books, hire someone.  Check with your tax preparer to see if they offer this service.  If not they probably have someone they work with that they can refer.  Utilize technology by using QuickBooks Online and scan your receipts and invoices.  If you don’t have something like this set up, ask your tax preparation office if they can set you up.

I can’t stress the importance of what I just said.  The quickest way to fail is by letting this stuff go until the last minute.  And really, that last minute is usually late.

Conclusion:

I think one of the most important things for me to be aware of is that your financing agreements are properly calculated and the determination made to whether the lease is a loan or are you simply “renting’ the equipment.  The proper designation could greatly affect your taxes in the current year.  Taking advantage of the myriad available tax deductions, and understanding how different treatments can affect your tax bill can contribute to the financial success and growth of a dental practice.