Tax reform, commonly referred to as the Tax Cut and Jobs Act, has many new provisions that became effective for tax years beginning January 1st, 2018. One provision in particular created a deduction up to 20% of “qualified business income” earned from pass-thru entities and sole proprietors.
Dental practice owners may want to consider this new tax savings opportunity, but it is subject to a host of qualifications and limitations, so it requires careful strategic tax planning.
The deduction will be claimed on individual owners’ tax return Form 1040 and is commonly being referred to as the Section 199A deduction (referencing the Internal Revenue Code), or the 20% qualified business income deduction (QBID).
Business income is eligible if the company is structured as a Sole Proprietorship, a Partnership, or an S-corporation. C corporations are not eligible to take this deduction. Personal taxable income must be less than $315,000 for a married filer or $157,500 for a single filer to avoid the deduction being phased out. The deduction is fully phased out at taxable income of $415,000 for a married filer and $207,500 for a single filer.
Here are our Top 5 Strategies for dental practice owners to consider.
- Increased Retirement Plan Contributions
Increasing retirement plan contributions can reduce taxable income. Consider increasing contributions to an existing plan and consider if establishing a cash balance plan might be an additional vehicle for increasing contributions.
- Employing Children in Your Practice
You may have an opportunity to employ your children and pay them the highest reasonable rate for their work. Now each child can earn up to $12,000 per year free of federal income tax.
- Review Personal & Business Expenses
Consider whether some expenses can be captured as business expenses such as meals, phone, health insurance, travel, auto, etc.
- Take Advantage of Depreciation
Review all depreciation schedules and opportunities to keep income under the deduction thresholds.
- Health Savings Account
Establish and fund a Health Savings Account (HSA). Coverage under an HSA can provide tax-deductible contributions of up to $6,900 for a family and an additional $1,000 for each spouse age 55 or older.
Though tax reform is complex with lots of qualifiers and limitations careful tax planning can produce significant tax savings.