No dental practice makes tax mistakes on purpose. However, between the complexity of the tax code, and depending on how well you utilize the advice of your CPA for after-the-fact tax advice, mistakes can happen, and, even more critically, opportunities are frequently overlooked.
1) Waiting Until It’s Too Late
The top mistake dentists make is just that: Not engaging a tax professional until it's too late to act. Once the clock strikes midnight on December 31st, the game is over, and there’s very little you can do to impact the amount of last year’s taxes.
So at the very least, if the standard calendar is your practice’s calendar year -- meaning December year end -- spend the month getting a hand on where you are and what you might be able to do between now and the end of the year to do whatever’s possible to show lower profit or to identify a loss, to minimize your taxable income.
2) Not Maximizing Retirement Contributions
The second mistake is not maximizing retirement plan contributions, which is very common – especially amongst recently formed businesses.
There are two aspects: The first is not maximizing contributions within the parameters of the type of retirement plan you already have, but the second is that maybe it’s not the best retirement plan overall for your situation. There are other types of retirement plans beyond 401(k)s, IRAs or SEPs that might give you much greater flexibility on how to make the most effective contribution.
3) Improperly Labeling Employees
A really big mistake, especially within the last few years, is misclassifying employees as independent contractors. Now, of course, you know why businesses do that, they don’t want to withhold payroll taxes and generally minimize the administrative expense of a W-2 employee, but the IRS now has a long and detailed list of criteria that will help you distinguish between an employee and an independent contractor, and the taxing authorities keep a sharp eye on this. In addition to the tax consequences of calling someone a contractor versus an employee, there can be serious liability and penalty problems as well. If you’re classifying someone as an independent contractor, that means you don’t have workers compensation or other insurance that you probably should have on them, and if there is a problem on the work site that could cost you a lot.
Mismanaging your company’s tax status can also cause problems, whether you’re a C-corp, an S-corp, an NLC, a partnership, or a sole proprietor, paying attention to what you should be will help you make sure that you make fewer mistakes, and thus results in the best possible tax outcome.
4) Not Separating Out Your Real-Estate
Another problem that’s very common is owning your real estate inside the company. If you own a business and you own real estate, it’s understandable that you might want to have them all in one place, but that’s not the right way to do it. You should have them in separate entities, your company entity in one place, and your real estate as a separate entity, and then treat yourself just like any other landlord would treat you. It’s got to be at arm’s length, but there is a good deal of flexibility that can ultimately impact your tax situation favorably. Another issue are improperly structured buy-sell or continuity agreements between the partners. An improperly structured agreement could mean that it's old, the evaluation clause doesn’t work, or there is no funding for it, whether through life insurance or a sinking fund, etc. But it could also be that you’ve got a stock redemption agreement instead of a cross purchase agreement. This can get pretty technical, but the important thing to understand is that there is “more than one way to skin the cat.”
5) Not Accounting for Depreciation
The final tax strategy mistake we’ll touch on is in determining when you’re buying equipment, whether or not you should depreciate it or write it off. Here, the tax code is fairly liberal and it allows you to write-off up to $250,000, as of today’s tax-code, for equipment that you’re buying in a single year. So if you’re in a low tax bracket this year, you’ll probably don’t want to write that expense off immediately, and you’ll probably want to spread that out over its useful life, maybe 7 to 10 years. Conversely, if it’s December, and you have a big hunk in taxable income gains, it might make sense to buy your January equipment right now, in December, and then write that off on this year’s taxes to minimize your taxable income.
Getting your taxes right is an imperfect science, and you won’t get it right every year. However, paying attention to the issues discussed above and working closely to with your tax professional before the year’s end, will save you a great deal time, trouble, and money in a long run.