Tax Reform and the Question that Dental Professionals Care About
I have been doing a significant amount of speaking in 2018 and into 2019 around the topic of tax reform. Most recently, I was speaking to a group of dental professionals at a local dental society and their concerns and questions are the same I have been hearing over the last year.
Question: What is the new 20% Qualified Business Income Deduction (QBID) and how will it effect my personal income tax return?
My answer: The 20% QBID is for a trade or business that is taxed as either a sole proprietor, partnership, or an S corporation. In most cases, the QBID is equal to the lessor of 20% of the qualifying income from the trade or business or the individuals taxable income minus capital gains. The deduction is generally available to those with 2018 taxable income below $315,000 (for joint filers) and $157,500 (for other filers). Dentists are considered a specified service trade or business (SSTB), which has additional (more strict) limitations once taxable income begins to exceed the limits mentioned above ($315,000 for joint, and $157,500 for all others). Why should you care? Because as a SSTB, once your taxable income exceeds $415,000 (for joint filers, or $207,500 for all others) you are no longer eligible for the 20% QBID on SSTB income. So, some of the tools we see in managing taxable income include; increased retirement plan contributions, increased charitable contributions, maximizing your business deductions, accelerating depreciation, among many other things. With all of that said, there is still a lot guidance needed before we can fully assess the impact and opportunities of this new deduction.
My answer TODAY: On January 18, 2019, the IRS released guidance and final regulations on many of the issues. Rental real estate is one of those issues that were addressed. In general, a rental real estate activity will qualify for the QBID if the owner is providing services with regularity and continuity. Also, the rent you receive from your practice could qualify, but it is subject to the same SSTB rules and limitations as the practice noted above.
Question: Will my taxes go up as a result of losing a portion of my state, local and real estate tax deduction?
My answer: It depends on a lot of factors;
- Did you itemize in the previous year?
- Were you subject to the Alternative Minimum Tax (AMT)?
- Will you itemize this year?
With that said, you should be talking with your tax adviser regarding the impact and opportunities of tax reform.
Question: Are the meals and entertainment expenses of my practice still deductible expenses?
My answer: Yes, those expenses are generally still deductible but the percentage of deduction could vary. For example, office events (e.g. holiday party, company picnic, and events for employees) are 100% deductible, but meals provided by the practice for working overtime are only 50% deductible (previously 100% deductible). Most meals will be 50% deductible as long as there is an ordinary and necessary business purpose for the meal. The biggest change in this area is the removal of entertainment as a deductible expense. For example, sporting tickets purchased for employees, referrals, patients, etc. are no longer tax deductible expenses.
Question: What is the best entity under tax reform, and should I change to that entity if I am not currently structured that way?
My answer: I am always hesitant to tell any practice owner to make a change especially due to tax reform. Tax law is always changing and every presidential office wants to leave their “mark” on tax law, which means nothing is permanent even if permanently written into the law.
I will say that many practice owners have been able to take advantage of the benefits of being an S corporation rather than a C corporation. The biggest advantage is the avoidance of double-taxation when the practice is sold in an asset sale. Asset sales are very common in the dental industry, and as a result, a C corporation can have a higher tax liability over its lifetime.
This is the most significant tax reform we have seen in over 30 years, and it is incredibly complex. If you haven’t, you should be consulting with your tax adviser on the impact and opportunities of tax reform.