As a dental professional, managing your practice, staying up-to-date with the latest technology, and providing top-notch patient care can be full-time. It can seem overwhelming to keep up with your finances and ensure you take advantage of the tax deductions available.
This blog post will provide valuable tax tips, including what deductions you can claim, which are often overlooked, how to keep track of expenses, and some common pitfalls to avoid.
Timing of your deductions
When you can take a deduction depends on your accounting method.
A cash-basis taxpayer can generally deduct business expenses in the year they are paid.
An accrual basis, taxpayer needs to follow IRS rules to determine when a deduction can be applied. Generally, expenses are recognized when incurred, regardless of when payment is made. You will find those rules here.
Common tax deductions for dentists
To maximize your tax savings, you’ll need to understand what expenses are typically deductible for dental professionals. Here is a list of common deductible expenses:
A. Continuing Education: You can deduct the cost of continuing education courses, seminars, and conferences that help maintain or improve your professional skills.
B. Equipment and Supplies: The cost of purchasing, leasing, or maintaining dental equipment and tools, as well as the cost of consumable supplies, can be deducted.
C. Home Office: If you have a dedicated space in your home used exclusively for your dental practice, you can claim a home office deduction.
D. Insurance: Premiums for malpractice, business liability, and other professional insurance policies are deductible expenses.
E. Professional Fees: You can deduct fees for professional services, like legal, accounting, and consulting services, related to your dental practice.
F. Rent and Utilities: If you rent or lease space for your dental practice, you can deduct the cost of rent and utilities.
G. Staff Wages and Benefits: Salaries, wages, bonuses, and benefits provided to your staff are deductible expenses.
H. Employee salaries and benefit plans are deductible, assuming compensation is deemed “reasonable.”
I. The cost of business insurance is deductible as long as it is “ordinary and necessary.”
Deductions often overlooked by dentists.
Here are some deductions you might overlook:
A. Start-up costs (legal fees, incorporation fees, etc.), limited to $5000 for the first year and the balance amortized over 15 years.
B. Section 179 of the IRS tax code permits dentists to deduct the total cost of qualifying purchases (machinery, equipment, tools, etc.) in the current tax year rather than depreciating them over time, subject to complex guidelines.
C. Meals: You can deduct business meals and refreshment expenses. In addition, you can deduct business lunches for you and your employees. They must be both reasonable and supported by receipts.
In 2023, deductions for business meals are only 50% deductible.
D. Interest on a business loan, including a line of credit or mortgage (up to a maximum of 30% of your business income)
E. Business travel expenses: Dentists can deduct expenses related to business travel, such as airfare, lodging, meals, and transportation.
F. Vehicle expenses: Dentists can deduct expenses related to using their vehicle for business purposes. Be sure to track mileage, fuel, and maintenance costs.
G. Marketing and advertising expenses: Dentists can deduct expenses related to marketing and advertising their practice, like website development, print ads, and direct mail campaigns.
H. State income and state sales tax.
I. Charitable expenses, including sponsoring sports teams.
J. Costs associated with looking for a new job if your total miscellaneous itemized expenses exceed 2% of adjusted gross income.
K. Clean vehicle credit. Check if you qualify for tax credits for certain “green” vehicles. These credits are set forth in the Inflation Reduction Act.
You can find other commonly overlooked deductions here.
Tips for tracking expenses
It is important to document all tax deductions so you can accurately report them on your tax return and reduce the taxes you owe. Failing to document deductions can result in inaccurate reporting, which may lead to underpayment of taxes, penalties, or even an audit by the IRS.
If you are audited, you will be required to provide documentation to support your claimed deductions. Without documentation, you may be subject to additional penalties and interest.
Here are some tips for tracking your expenses:
A. Use Accounting Software: Investing in accounting software can help you efficiently organize and track your expenses. Popular options include QuickBooks, Xero, and Zoho Books.
B. Keep Receipts: Retain receipts for all deductible expenses, and consider scanning them for digital storage.
C. Separate Business and Personal Expenses: Use separate bank accounts and credit cards for business and personal expenses to simplify your record-keeping.
D. Stay Organized: Regularly update your expense records and categorize them based on the type of deduction.
Common tax pitfalls
Poor record keeping of tax deductions, failure to claim all deductions, and mixing personal with business expenses are all common mistakes. This includes not keeping adequate records to support deductions, claiming deductions that are not allowed, and failing to report all income. This can lead to missed deductions, incorrect tax filings, and potential penalties.
To avoid these issues, keep accurate and detailed records of all business expenses, separate personal and business expenses, and consult with a tax professional to clarify what expenses are deductible.
Finally, filing late or inaccurate tax returns is a common problem you need to avoid. According to the IRS, each year, approximately 10million people fail to file their income tax returns.
If you can’t file your returns on time, you should get an extension before the tax deadline. The consequences of missing the deadline, not getting an extension, and owing the IRS are severe. You can be liable for a late filing penalty of 5% of the monthly unpaid tax plus interest.
File your returns electronically, if possible. The error rate of paper-filed returns is 21% compared with less than 1% for e-filed returns.
Seek professional assistance
While having a basic understanding of tax deductions and record-keeping is essential, seeking professional assistance can be invaluable. A certified public accountant (CPA) and financial advisor with experience in the dental industry can help you navigate complex tax regulations, identify additional deductions, and ensure your tax return is accurate and compliant. They can also provide valuable guidance on tax planning strategies to optimize your tax savings.