Tax Changes To Watch For In 2018

2018 taxpayers will see many changes related to individual taxes due to the “Tax Cuts and Jobs Act” passed in December 2017. Many of the provisions in the new law expire (sunset) January 1, 2026. The changes affecting most individual taxpayers include:

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Don’t Be So Quick to Turn Your Head on High Overhead

So you’re in the market looking to buy a dental practice, and you’ve seen information from brokers with summary practice information.

As you’re looking at the overhead information, you think that some of the OH stats look really low and that must be great, and some look really high, and that must be terrible, so you quickly disregard the high OH practices and move on.  Well, I’m here to tell you that sometimes the opposite is true.

The ones that appear to have low overhead may not have low overhead at all, or there’s a not so good reason the overhead is low….that’s going to have to wait for another blog. This blog is about the practice with what appears to be high overhead, which you think is bad.

Like ANY practice purchase transaction, a buyer MUST do their due diligence, and I’m here to tell you that sometimes high overhead can be a good thing.

First, higher overhead while generally not a good thing will usually generate a lower asking price. Higher overhead means lower profits; lower profits usually mean lower values. So from a buyer’s perspective, a lower price can be a good thing in terms of price.

Second, once you dive into the overhead and find out WHY it’s so high, you might learn a little more about the practice and how the owner is actually running the practice. Maybe they’re being lazy and not shopping around for the lowest cost of supplies or worse; maybe they’re letting a staff member handle all the supply ordering without any controls. Maybe they’re using the most expensive labs out there. Maybe they’ve cut back to working three days a week which can make some of the fixed expenses seem high like rent, utilities, insurances, etc. and maybe they’re still paying staff for four days per week.

Third, maybe they’re a fairly aggressive taxpayer and like to try and deduct as much as they can thru the various expense categories. Sometimes this is the hardest area to verify and confirm, other times this can be detected and verified. This is when we get to advise the buyer that the overhead will be lower under their watch.

Fourth, one common aspect of high total overhead is high labor costs. As noted above, maybe it’s because the staff is getting paid for more hours than they’re working. That can be an easy fix, just add another day of production to match the hours they’re getting paid for…assuming the patients are there to allow this. Maybe the owner has been very generous and the staff is paid at the top of the market or even above the market for the area, or the owner is paying 100% of their health insurance premium and some pension contributions. This is a little more difficult to address and will usually require a buyer to “ease” into proper compensation and benefits. Sometimes it fixes itself when the employees leave, and the buyer can replace with market rate pay.

Lastly, and the main reason for this blog, is maybe it’s because the hygienist comp is running 15% of revenue when it usually runs around 8-10%. Unfortunately, some buyers and their advisors won’t even look this deep to know exactly where the issue is. This is one reason we want to see the W-2s for each year and break them down into their departments. Many times, if hygiene wages are high it usually means the practice is generating a lot of hygiene production and you’ll be able to see this when you breakdown the production by provider. You may see hygiene production at 40% of total production when it usually runs around 25%. When you see it at 40% or more, you’ll almost always see hygiene wages greater than 10%, and that drives up the overhead percentage. It also usually means many of the other categories will be higher than the normal ranges as a percentage of revenue because there’s not enough dentistry. This isn’t always the case; however, we see it quite a bit with high overhead, high labor practice stats.

The lesson to learn here is DON’T automatically run away from a practice that appears to have high overhead. Look at some of the other stats first like the breakdown of production by provider, the specific department wage percentages to revenue and look at the schedule to see how many hygiene hours they have per week compared to dentistry hours. This information alone may provide the insight you need to pursue the opportunity and do a little more digging to see what the real deal is.

Sometimes these high overhead practices are the goldmines you often read or hear about. Good luck and happy practice hunting!

About Tim Lott

Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at tlott@dentalcpas.com or any of the other dental partners/principals at (800) 772-1065 or info@dentalcpas.com. For more blogs, visit our Dental CPAS blog page.  

Forgotten Tax Deductions

It’s estimated that most dental practices overpay their taxes. We don’t want yours to be one of them!

There are several deductions where your dental practice could be saving money on taxes, even on everyday expenses. Two words to keep in mind when claiming dental tax deductions: ordinary and necessary. Both conditions must apply for the expense to be tax deductible.

Read below for eight dental tax deductions to keep more money in your practice. 

Some tax deductions you’re probably already aware of, like premiums for malpractice insurance or the 50 percent deduction for meals and entertainment.

 Talk to your tax advisor to see what applies in your situation.

Supplies

Everything from toothbrushes to cotton balls to dental eyewear can and should be tracked – and deducted. This includes office stationery and administrative supplies.

Lab Fees

Lab fees can be 10 percent or more of your practice’s budget, so make them count on your taxes. Think x-rays, crowns, partials, molds, and dentures. Keep track of these fees for tax savings.

Continuing Education

Even if you don’t consider yourself a lifelong learner, your office’s yearly subscription to a dental industry magazine could be tax deductible. So could your costs and fees associated with exams, licensing, conferences, and certifications. Go ahead and pursue that specialty!

Vehicles

There are three ways to deduct vehicle expenses: 1) buy the vehicle through your dental practice (if your business structure is a corporation), and include personal vehicle expenses as income on your individual tax return 2) track mileage expenses or 3) track actual expenses.

Number one is complicated and merits a call to your tax advisor. The current mileage rate is 53.5 cents per mile for 2017 (54 cents per mile for 2016). Or, to track actual expenses, keep a log of oil changes, repairs and maintenance, gas, and so on. Note that ordinary trips to and from your office don’t apply for standard mileage rates, but trips to other offices or business meetings do.

Utilities

Keep a record of your dental practice’s water, electric, gas, phone, internet, rent and/or mortgage payments.

Employee salaries, healthcare, and retirement accounts

You probably already know you can deduct the employer’s contributions to retirement and healthcare accounts. But you might not be aware of the recent change allowing employer-funded health savings accounts, or that your spouse can earn a salary that can also save money on taxes (there are many ways to do this; call our office for more information).

Read our blog post on Tax Savings for Dentists for more information.

Advertising and marketing

The cost of promoting your dental practice is tax deductible. So take out that ad in the local business journal, and send those mailers. Then include the fees on your taxes.

Legal and Tax Fees

Finally, you can deduct the cost of your attorney and tax professional. We can show you how – contact us today!

Tech Practice Investments

The modern dental practice is an efficient, patient-centered experience that seamlessly integrates technology into everyday processes and procedures. Does this sound like your dental office? Even if you answered yes, read on for suggestions on the best technology to invest in for a more productive, profitable dental practice – and how to make your equipment wish list a reality with bonus depreciation.

CAD/CAM Technology

If your dental practice doesn’t yet have a CAD/CAM system, now is the time to consider it. CAD/CAM, or computer-aided design and computer aided manufacturing, is a digital process that improves the design and creation of crowns, dental implants, dentures, and more. Since these systems can cost upwards of $100,000, it’s an investment that requires significant thought and careful planning.

3D Printing

Going hand in hand with CAD/CAM systems, 3D printing will allow you to produce your own custom orthodontics, implants, and restorations in the office. There are printers specific to orthodontics, general dentistry, and dental surgery, each with their own specifications. The cost of 3D printers varies and will generally be less than $5,000.

Practice Management Software

There are many options for practice management software. The best software solutions will mirror your workflow and automate key processes. Costs vary from a few hundred dollars for the set-up of a cloud-based software program for a small office to $15,000 and above for locally hosted software programs and/or larger offices.

Keep In Mind: Certain types of software may not be eligible for depreciation. Contact our office for details.

Purchasing one 3D printer should be fairly easy for most practices. After all, most corporate credit cards or lines of credit have a limit higher than $5,000. What if you’re looking at purchasing more than one 3D printer, investing in a custom software package, or buying a CAD/CAM system? Assuming you don’t have a large cash reserve or high credit line, what are your options for adding this technology to your dental practice?
The solution is bonus depreciation.  2017 is the last year for 50 percent bonus depreciation; the value decreases in 2018. As of now, bonus depreciation is set to expire in 2019.

What Is Bonus Depreciation?

When you make capital upgrades to equipment or property, you can recover the cost of those upgrades through an annual tax deduction called depreciation. Most tangible property can be included, such as office furniture, computers, vehicles, and – you guessed it – CAD/CAM systems, 3D printers, and computer software.

What’s Not Included

Although you can include many capital improvements in bonus depreciation, you cannot include the following:

• Land
• Property with a useful life of less than one year
• Property that is disposed of the same year you purchased it
• Personal property

How It Works

Typically, the cost of a capital upgrade is depreciated over the course of its useful life – generally, five years or more. But for equipment or property placed into service in 2016 and 2017, bonus depreciation allows for an immediate 50 percent deduction the first year. In 2018 and 2019, the benefit decreases to 40 percent, and – as of now – bonus depreciation will expire after 2019.

Depreciation allows you to recover the cost of normal wear and tear over the life of, say, your office’s dental chairs. An oversimplified example is if you purchased three new dental chairs in 2016 for $3,000 each. Instead of spreading that cost over seven years, if you bought the new chairs in 2016, you could deduct 50 percent of the basis – the amount you paid for the chairs – the year you placed the chairs into service, which was 2016. If you bought the chairs in 2016 but didn’t install them until 2017, then the useful life begins in 2017, the year you placed the chairs into service.

The benefit is that you get more money back quicker. See our example below.

Calculating Depreciation

To calculate depreciation, you’ll need the total amount you paid, the year the equipment was placed into service, and the equipment’s salvage value – how much it’ll be worth at the end of its useful life. Subtract the salvage value from the total amount paid. This is the amount you can depreciate over the equipment’s useful life.

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Example:
You purchase a new CAD/CAM system in 2016 for $100,000 and it has a useful life of seven years. You determine its salvage value to be $20,000. The difference is $80,000. You can deduct $80,000 in depreciation over seven years.

Purchase Price: $100,000

Useful Life: 7 years

Salvage Value: $20,000

100,000 – 20,000 = 80,000

80,000 / 7 years = $11,428 yearly depreciation deduction

Each year for seven years, you could deduct more than $11,000. But if you use bonus depreciation, you could deduct $40,000 in Year 1 and about $6,600 for each of the remaining six years.

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Depreciation terms vary based on the equipment. Note that while you can depreciate the cost of improvements to land, you cannot depreciate land itself. Calculating depreciation is more complex than the simplistic example we provided above. You should consult with a tax professional to review your specific situation.

Next Steps

If you’ve been thinking about making technology or other upgrades to your dental office, 2017 is the last year to take advantage of 50 percent bonus depreciation. Consider your goals for your practice and how you want to improve the patient experience. Then, contact us to go over your options. We can assess the tax implications of any new office upgrade and help you get the most out of your investment.