As we look at changes made to the tax code in last year’s tax reform, we do so specifically through the lens of how this might impact our many dental clients who we have the privilege of serving. Dentists who own their own dental practice can take advantage of many updates to the tax code for 2018. The one we’ll talk about specifically today is the qualified business income deduction.

What’s new:

If your dental practice is set up as an LLC, S Corp, Partnership or Sole Proprietorship, you are set up as a pass through entity — meaning revenue is passed on to you to be taxed at your personal income tax rate. While many corporations will see their taxes cut in 2018, pass-through entities experience some benefits too.

Now, the dentists which owns a pass-through entity can likely deduct 20% of their qualified business income. In other words, now just 80% of your qualified business income is subject to taxation.

There is a phaseout schedule for very high income earners, which may affect some dentists. For single filers, your taxable income must be under $157,500 or $315,000 if married filing jointly to qualify for the 20% deduction. After this dollar amount there is a gradual phaseout of the deduction until the single filer hits $207,000 and the married filing jointly filer reaches $415,000.

Planning opportunities:

As we dig deeper into your financial situation we uncover ideal ways to plan for opportunities within our tax code. We feel like the qualified business income deduction is a great benefit which will impact the majority of our clients in a positive way. However, the deduction may not happen automatically. You may need to change your business structure, the way in which your payroll is handled, or other aspects of your business accounting in order to qualify for the deduction.

So what are the planning opportunities?

Dentists who might be in the phaseout income level or perhaps do not qualify at all based on income may benefit from some income reduction strategies in the eyes of the IRS. There are a few that come to mind. Contributing to a qualified retirement plan reduces gross income, making business purchases or new hiring — perhaps it would be a good year to purchase new software for your business, or new furniture for the office. This reduction in gross income might put you back in play for the deduction while at the same time setting yourself nicely for other personal or business goals. 

Other planning opportunities include deciding how this deduction might change what sort of retirement fund you contribute to and why. A well-constructed financial plan can reveal ways of investing in your business that will allow you to qualify for the tax deduction, and also allow you to use that capital for business expansion, debt reduction or to build wealth for other goals.

What does this mean for you?

Look at this deduction in great detail and you’ll find the planning opportunities come about when you start thinking less about the money you’ll save on your taxes, and more about how the tax savings could go hand in hand with your overall financial plan. It is clear if you are at or near the income level threshold, you will certainly benefit from some creative tax planning to get ahead of the curve. This is a huge tax benefit and one that can be realized by most dentists with sound financial and tax planning.