Dental Practice Ownership isn’t for the faint of heart. As one client said, “If it was easy, everyone would do it.” In many ways, practice owners double their finances and responsibilities, with different rules at every turn. In addition to a home mortgage, they now also pay a commercial real estate lease. On top of managing personal finances, they also manage a profit and loss sheet. They file two instead of accounting for and filing one set of taxes.
Are there benefits to this burden? If so, what are they?
We tapped Matt Peterson, a CPA at Cain Watters & Associates (CWA) to answer this question. Before joining CWA, Matt spent nearly a decade at KPMG in tax and advisory roles for Fortune 1000 companies. Below he shares what tax benefits - if any - can help entrepreneurial doctors make the most of their role as practice owners.
The answer, Matt said, is that they’re plentiful.
But there are two tax advantages that he prioritizes with nearly every client:
- retirement-based tax advantages and
- tax advantages that from strategically identifying business-related expenses.
1. Retirement-based tax advantages
What are retirement-based tax advantages?
Most people are familiar with different types of retirement plans. There's a simple IRA, a SEP IRA, and a 401(k), to name a few. When doctors have worked as associates, they often have had the benefit of accessing of these retirement accounts. But as a practice owner, if you have a 401(k), you have access to the possibility of a much larger contribution. The larger contribution can be achieved by maximizing your Employer Contribution.
How do they work?
A 401(k) plan is what's called a defined contribution plan. The IRS sets contribution limits to the plan each year. To ensure fidelity to these limits, practice owners must hire a third party - a pension administrator - to test the plan each year. The administration will look at the IRS’ guidance and determine the amount that the practice owner must contribute to his or her staff. The doctor's contribution depends on several factors such as
- staff size,
- staff compensation and
- how long they've been employed.
The third party will also ensure that your contribution plan passes discrimination testing.
Note that there are also legal fees to set up the plan, in addition, the cost of the contributions themselves.
However, if done properly, maximizing your 401(k) contribution for both your staff and yourself will most likely save more in taxes than the costs associated with running the plan.
So essentially, by owning your business, and setting up a 401(k) plan, you're able to have your tax savings subsidize your retirement.
What are the next steps?
While every practice owner should seek the advice of their financial advisor first, there are clear benefits to maximizing a 401(k) plan.
If you’re looking to
- Set up a 401(k) for the first time
- Review your 401(k) plan or
- Ensure that your pension administrator has properly tested your 401(k) contributions,
Contact us or reach out to CWA.
Matt recalls one client in particular.
“A new client came in with an existing 401(k) plan open for the last 10 years. When I suggested evaluating it to ensure it was optimally planned, they originally pushed back—confident it was. But when we went through their tests, I found that they were costing themselves $10,000 to $15,000 extra each year because the plan wasn't being tested properly.”
To Recap
One of the biggest benefits of owning your practice from a tax perspective is the ability to run a 401(k) and maximize your contributions. Even with the cost of staff contributions and administrative costs, the tax savings will likely exceed the cost of running the plan.
2. Identifying business-related costs.
The second tax advantage that CWA prioritizes with its clients is identifying business-related costs.
What are business-related costs?
Business-related costs are costs that blend the personal and the business.
If that's not crystal clear, it's because, Matt says, "There’s a little bit of an art to it." For example, most people talk to their spouse about work, and maybe even get advice from him or her. If you’re not a business owner, your spouse is not paid for that work. However, if you are a business owner, it seems fair that your spouse should receive compensation for their work. This could be informal consulting - "What do you think I should do about this or that?" Or more formal support like handling supply orders, picking up the uniforms from the cleaners, or dropping off presents for referrals. Matt says that spouses can and should get paid for the consulting and other services they provide for the practice.
How does it work?
You want to set up your spouse in the payroll system like a true employee. He or she would receive a W2 and pay payroll taxes. Their title and role can be based on the type of work that’s being done.
Further, if you, as the business owner, pay your spouse on payroll, they then get to participate in your retirement. You can contribute to the 401(k) through their payroll.
Note that meals for the business and travel costs often blend the personal and professional as well. They can be categorized as dental practice ownership business-related expenses.
To recap:
By shifting expenses that you would pay with after-tax dollars to pre-tax dollars, you decrease your tax liability and ultimately pay less in taxes.
In Summary,
The tax advantages of dental practice ownership are a real financial benefit to the doctor owner. Finding the right players to work with is key. With a
- a dental-focused CPA,
- a skilled attorney to set up your 401(k) plan and
- experienced pension administrators,
doctors can rest assured that they are maximizing their retirement plan. In addition, knowing the right way to use tax deductions is critical. While a lot of life’s expenses are not business-related, it’s worth seeking guidance on the ones that are.
If you’re looking to set up a 401(k) or get professional guidance to enjoy your full benefits as a practice owner, contact us or reach out to Cain Watters & Associates, an established, trusted partner of Practice Real Estate Group.
