it’s tax time!
Effective Tax Planning
for Dentists By Ben Anders, CPA
Innovative Solutions CPAs SDDS Vendor Member
Ben Anders, CPA is a partner at Innovative Solutions CPAs & Advisors, LLP, a Sacramento accounting firm specializing in comprehensive, holistic accounting, tax and financial planning solutions for dentists and their practices.
If tax deductions are your destination, then the tax code is your road map. As you follow this map, tax strategy dictates the kind of car you will drive, the road you will take, your departure and arrival times, and how fast you will drive. To arrive as quickly as possible at your destination, you must choose the correct route, select the right kind of car, leave on time, and avoid getting caught speeding. In tax language, this means knowing the tax law, adhering to IRS rules, keeping good records, meeting required deadlines, and engaging in ongoing pro-active planning. Effective tax planning combines knowledge of the tax code with tax strategy to help you achieve your goals. And if you’ve ever taken a trip, you know that planning is half the fun. With effective tax planning you can: • Use the tax law to your advantage • Convert temporary deductions to permanent deductions • Convert non-deductible personal expenses into deductible business expenses • Lower your audit risk • Move more quickly towards your wealth goals Using The Tax Law To Your Advantage The government specifically incentivizes those who help it achieve its primary objectives of increasing jobs, housing and the economy. These people are generally business owners and investors. Proper tax planning moves you into one of these categories and allows you to take advantage of the intended benefits of the tax code.
14 | The Nugget • Sacramento District Dental Society
As business owners, self-employed dentists are helping the government achieve its objectives. In addition to the typical deductions for business expenses, dentists who manufacture items in-house such as crowns and dentures can take advantage of the Domestic Production Activities Deduction and save several thousand dollars in taxes each year. Tax strategy dictates good record keeping to separate income and expenses related to the manufacturing activity from other income and expenses generated in the business. Temporary vs. Permanent Deductions Many of the most popular deductions, such as contributing to a 401(k) plan are temporary; they just defer the taxes until later. The best deductions are permanent, meaning they reduce your taxes forever. Employing a solid tax strategy helps you take advantage of the permanent deductions and helps you turn some temporary deductions into permanent deductions. Permanent deductions generally move you more rapidly towards your wealth goals. Depreciation is a temporary deduction that can be made permanent. Let’s use rental real estate as an example. The depreciation deduction is temporary because when you eventually sell the property, gain on the sale will be increased by any depreciation taken over the life of the asset and “recaptured” as income. A tax strategy of keeping a piece of real estate for the long-term and passing it to your heirs when you die makes the depreciation deduction permanent because it removes all the depreciation recapture and allows your heirs to sell it essentially tax free, or to keep it and depreciate it all over again.