Running a dental practice takes a lot of time and effort, but it also takes money. Fortunately, there are tax benefits for dentists that help to offset these costs.
The IRS offers several tax benefits for dentists, some of which are typical business deductions and others that specifically help small businesses become more productive by lowering the cost of equipment. With the many changes that came about as part of the 2010 Tax Relief Act, there have been a several tax law updates that dentists should be aware of when filing their taxes.
Recent Tax Law Changes that Affect Dentists
One of the two provisions in the Tax Relief Act of 2010 that impacts dentist practices this year and to a lesser effect next year are the changes on Section 179 expensing and Bonus Depreciation. Generally, when applying these provisions the Section 179 is taken first and then Bonus depreciation is applied next (if the business is profitable). So what does this mean for dentists?
With time still left, dentists who purchase or lease new or used equipment such as dental chairs, x-ray machines, off the shelf software, and other large dental equipment can expense/deduct or write off up to $500k of it as long as it is placed into service before the end of 2011. This deduction phases out dollar for dollar after $2 million in equipment purchases is reached. For 2012, the former numbers drop to $125k and $500k respectively.
But what if your dental practice needs to spend $750k for example? Well, the good news is that the remaining $250k that you normally would depreciate over a few years, or the capital expenditure that exceeds $500k can be depreciated by 100% in 2011 (as long as it is placed into service in 2011) with no limit on the price. The only caveat is the bonus depreciation only applies to new equipment only. For 2012, the 100% depreciation percentage drops to 50%.
So let’s look at an example. If you were to purchase $700k in new equipment this year (or you did already), then you would be able to write off that $700k. If you are in the 35% tax bracket, your tax savings would be $245k and the true cost of the equipment would be $455k. Pretty nice!
How you choose to use the provisions above depend on your individual situation, income and tax liability. While some practitioners will find the immediate deduction to be beneficial, others will find that it is better for them to spread it out over several years. It is a good idea to consult your tax advisor to determine the best method for you.
Finally, employees at dental practices are entitled to a minimum 2% reduction in payroll taxes, although the employer portion of the tax does not qualify for this. This reduction applies to paychecks for the calendar year 2011. Self-employed dentists can apply this reduction to the half of their taxes that is considered the employee portion.
Additional Tax Benefits for Dentists
The costs of doing business are typically tax-deductible, and dentists have many other costs that can be deducted in addition to those standard business deductions. Think of all the things that you must purchase in order to run your practice each day. Dental supplies, utilities, insurance (malpractice and other), alarm and/or security service, phone and internet service, facility and equipment rentals, lab expenses, the costs of removing waste and more are deductible.
Some employee-related expenses are deductible as well, such as uniforms and the cleaning of those uniforms, payroll, the employer’s part of payroll taxes, healthcare benefits you provide to employees and other employee benefits such as meals that you may occasionally offer.
Lastly, the extra costs of promoting and improving your business are also tax-deductible. These might include continuing education to improve your ability to do your job, professional organization dues, industry magazine subscriptions, business-related travel, promotion and advertising.
It is always a good idea to work with a CPA that has a lot of healthcare related customers (specifically dentists) in order to ensure you are taking advantage of all the tax benefits available to you.