Tax tips for dental and healthcare practice owners

Tip 01

Preparation is not planning, and most owners only pay for the first one

Preparation is a historical exercise. It records what already happened and calculates what you owe. By the time it starts, every decision that mattered has already been made. Planning happens in advance: it looks at your entity structure, your compensation, your equipment timing, and your retirement design, then arranges them so the return comes out lower before the year ends.

Every dentist has someone who files the return. Far fewer have someone who plans the year before the return is written. If you call in April asking what can be done about the number, the honest answer is almost nothing.

From The 41 Deductions Dental Practices Miss

Tip 02

The deductions practices miss are ordinary, not exotic

There are roughly 41 legitimate deductions available to a dental practice. An owner working through them honestly usually finds between eight and twenty they are not currently claiming, worth somewhere between $4,000 and $15,000 a year. The deduction is not the risky part. The missing receipt is.

The categories where they hide:

• Clinical operations. Small instruments below your capitalization threshold, which need a written policy to expense immediately. Annual software prepayments, which can be timed into the year you need the deduction.
• Facility and occupancy. Rent paid to your own real estate entity under a properly structured lease. A cost segregation study on a building you own frequently accelerates six figures of depreciation into the first few years.
• Team and payroll. Employer retirement contributions, where plan design matters enormously. Company-wide events, which are treated differently from a lunch with two employees. Bonus timing, where declaration versus payment decides the year.
• Owner and professional. The most underclaimed category, usually because nobody told the owner it was available. Home office used regularly and exclusively, which also makes the drive to the office deductible in many cases. Owner retirement contributions, often the single largest deduction available.
• Growth and advisory. Coaching and consulting fees. Charitable sponsorships that carry visible branding, which are often advertising rather than charity, and that is the better treatment.

From The 41 Deductions Dental Practices Miss

Tip 03

If you are an S Corp, the salary split is worth thousands every year

Every dollar you pull out of the practice arrives one of two ways, and they are taxed very differently. As a sole proprietorship or single-member LLC, all profit is exposed to self-employment tax and there is no split to make. As an S Corporation, profit divides into a reasonable salary, which carries employment taxes, and a distribution, which does not.

The catch is the word reasonable. It has a legal meaning, and setting the salary too low is the most common way owners walk into an audit they would otherwise have won. Reasonable compensation is not a percentage someone picked. It is what you would have to pay another dentist to do the clinical work you personally perform, plus what you would pay an administrator for the ownership work, supported by data you can produce if asked.

Build it in five steps: separate clinical work from ownership work, price the clinical role against regional associate compensation, add the management role, sanity check it against practice profit, then write down the support on one page and keep it with the tax file.

From Are You Paying Yourself the Wrong Way?

Tip 04

Your attorney picked your entity for liability. Nobody rechecked it for taxes.

Most practice entities were set up in a hurry, before the practice had any revenue at all. You needed something to sign a lease, open a bank account, and close on a loan, so somebody formed one. Five years later the practice collects three times what it did, there is an associate and maybe a building, and the structure is still the one that made sense at zero dollars of revenue.

There are two separate questions that get collapsed into one. What your practice is legally organized as, which is governed by your state, and how that entity is taxed, which is a federal election you make separately. An LLC can be taxed four different ways. That is why the answer to "what should my practice be" is almost never a single word. A PLLC can still elect S Corp treatment in most states.

Four moments demand a review regardless of the calendar:

• You add a partner. The tax classification changes and the operating agreement has to carry buy-sell terms, distribution rules, and a valuation method. Doing this after the fact is far more expensive than doing it first.
• You buy the building. Real estate almost never belongs inside the practice entity. A separate holding entity with a documented lease protects the asset and creates planning opportunities that do not otherwise exist.
• You hire an associate. This changes your profit picture and your own reasonable salary calculation. Employee versus contractor classification carries real exposure if it is called wrong.
• You start thinking about selling. Structure determines how a sale is taxed, and useful changes take years to season. A fix three years out is worth far more than the same fix three months out.

The costliest problems we see are not wrong choices. They are right choices that were never revisited. A practice that elected S Corp treatment at $200,000 in profit and never updated the compensation figure as profit tripled is overpaying and exposed at the same time.

From LLC, S Corp, or PLLC?

Tip 05

Every point of overhead you recover is $10,000 a year, and it repeats

On $1,000,000 in collections, one point of overhead is $10,000 annually. Three points is $30,000 a year and roughly $150,000 over five years. That is also the number that follows you to the sale, because practice value is driven by earnings, so overhead you fix today raises the price you get tomorrow.

A well-run general practice runs total overhead between 55% and 62% of collections. Over 68% is an action zone. But before you react to any red number, three rules:

• Confirm the categorization first. Roughly half the red flags we see are bookkeeping problems, not spending problems. Lab coded into supplies makes both numbers wrong.
• Look at the trend, not the month. One heavy equipment month or a large lab case distorts a single period badly.
• Fix the largest category first. A two-point improvement in staff costs is worth more than eliminating every subscription you own.
• Do not cut marketing to fix overhead. It improves the percentage this quarter and creates a production problem two quarters out.

See the full target ranges for all seven overhead categories .

From Busy Is Not the Same as Profitable

Tip 06

On January 1 your options close, so work the deadlines in order

You need one thing before any of this works: a current-year profit and loss through the most recent closed month, plus a realistic estimate for the remaining weeks. Planning without a current number is guessing. If your books are three months behind, fixing that is move zero and everything else waits.

Highest leverage, tightest deadlines:

1. Project the year before you decide anything. Every move below depends on knowing whether this is a high-income year or a soft one.
2. Fund the retirement plan properly. For most profitable owners this is the single largest lever. Some plans must exist before December 31 even if funding comes later.
3. Decide equipment timing on purpose. Placed in service by December 31 counts this year. Arriving January 4 does not.
4. Choose the depreciation election deliberately. The largest deduction available this year is not automatically the best answer if next year is bigger.
5. Review owner compensation before the last payroll. The split is set through payroll, and payroll ends in December.
6. Time bonuses and staff compensation. There is planning room in declaration versus payment timing.

Steady value, still worth the hour:

7. Prepay what makes sense to prepay. Useful in a high-income year, counterproductive in a low one.
8. Clean up receivables and write off what is genuinely uncollectible.
9. Fund HSA and personal accounts, frequently left undone simply because nobody sent a reminder.
10. Reconcile the owner accounts while the year is still open and the memory is fresh.
11. Confirm your quarterly estimates by January 15. If the year outperformed your projection, this is your last chance to reduce underpayment penalties.
12. Set next year's plan in December. The best year-end move is not needing one.

From 12 Moves to Make Before December 31

Tip 07

A $120,000 scanner does not cost $120,000

When equipment gets discussed, the conversation happens around the sticker price and the monthly payment. Both are real. Neither is the number that matters. What matters is what leaves your household after the tax effect, and it is frequently thirty to forty percent lower than the figure the owner has been carrying around.

One rule governs all of it. The equipment has to be placed in service by December 31 to be deducted this year, and placed in service means installed and ready for use, not ordered and not paid for. A scanner that ships December 28 and gets installed January 6 belongs to next year. This single detail decides more equipment tax outcomes than any election does.

Section 179 lets you expense the full cost up to an annual cap, but it cannot create or increase a loss. Bonus depreciation deducts a percentage automatically unless you elect out, and that percentage has changed repeatedly by legislation, so confirm the current figure before planning around it. The standard schedule spreads cost across five to seven years and is the right answer more often than owners expect.

From Should You Buy It This Year?

Tip 08

New owners: keep practice and personal money completely separate from transaction one

Not mostly separate. Completely. Commingled accounts are the root cause of most of the expensive problems we clean up for new owners. They corrupt your books, they weaken your entity protection, and they turn your first tax return into a reconstruction project instead of a filing.

Beyond that, the setup that makes the next five years dramatically easier, in the order we build it:

• Open four accounts, not one. Operating, payroll, tax reserve, and owner distribution. Move 25% to 30% of collections to the tax reserve weekly, automated so it does not require a decision.
• Install a dental-specific chart of accounts. If lab, clinical supplies, and office supplies are not separate lines, your numbers cannot be benchmarked against anything.
• Start credentialing transfers before closing if you can. This is the most common cause of a cash gap in month two.
• Register for state withholding and unemployment. Separate from your EIN and frequently forgotten.
• If you elected S Corp treatment, get on actual payroll. Not a draw. Payroll with withholding, from the beginning of the year.
• Schedule quarterly estimated payments. The most common first-year cash surprise. Skip these and the bill arrives all at once with penalties attached.

The five filings new owners miss most: state withholding registration, state unemployment registration, quarterly estimated payments, local business license renewal, and personal property tax on equipment. None are large. All carry penalties, and every one is easier to handle in the first ninety days than in the first audit.

From Your First 90 Days of Practice Finances

Tip 09

Checking the bank balance is not a financial review

It is the most common financial habit in dentistry and it tells you almost nothing. A healthy balance can mean a strong month. It can also mean you collected on last quarter's production, delayed a lab payment, and have a tax bill coming that nobody set money aside for. Running a practice off the balance is like reading a single radiograph and calling it a full exam.

Nine numbers, ten minutes, the first business day of every month. That is the whole habit, and it is the clearest dividing line we see between practices that grow and practices that just stay busy. To make it stick:

• Put it on the calendar as a recurring appointment. Treat it like a patient already scheduled.
• Have your books closed before you sit down. You cannot review numbers that are not finished.
• Write the numbers down by hand for the first six months. Typing is faster; writing is what makes you notice them.
• Pick one number to work on each quarter. Nine metrics reviewed and one worked is a strategy. Nine reviewed and nine worked is a wish.
• Share the relevant numbers with your team. Collection ratio, new patients, and case acceptance belong on a board they can see. The ones tied to your compensation do not.

See all nine numbers with how to calculate each and its healthy target .

From The Nine Numbers to Check Every Month

Tip 10

The allocation schedule is the most expensive page in your closing documents

Two practices both sold for $1.4 million on the same day, and one seller kept substantially more. The purchase price had nothing to do with it. Sellers negotiate hard on the number and then sign the allocation schedule without reading it, and that schedule decides how much of the sale is taxed at capital gains rates versus as ordinary income.

Most dental transitions are structured as asset sales, where the buyer purchases the assets and the seller keeps the legal entity. Buyers prefer it because they get a stepped-up basis and do not inherit the entity's history. A stock or equity sale is often more favorable to a seller on taxes and considerably harder to get a buyer or lender comfortable with. If the practice is a C Corporation, an asset sale can trigger tax at the entity level and again on distribution, which is the most punishing thing to discover late.

Four questions to ask before you sign anything:

1. What is the allocation, and what does each category do to my tax outcome?
2. Is this an asset sale or an equity sale, and what does my entity type do to that answer?
3. When do I actually receive the money, and what does the timing do to my bracket?
4. Has anyone modelled my after-tax proceeds, or have we only discussed the purchase price?

From The Tax Decisions That Cost Sellers Six Figures. See also KLAS Practice Transitions (opens in new tab).