There’s been quite a bit written on this new tax deduction for small businesses so while I don’t want to re-write the same articles I thought it would be helpful for dentists to be aware of some of the nuances of this new deduction now that year-end planning season is upon us. You should speak with your dental CPA prior to 12/31 and even well before that to make sure you’re maximizing this new deduction if at all possible. Some of you won’t be able to benefit from this deduction, that’s a given.
To summarize, the Trump tax bill created a new deduction under Code Sec. 199A, better known as the qualified business income deduction. In its simplest form, the deduction COULD be 20% of a business’s net income. However, as usual with the tax code it’s not that simple, and many dental practice owners won’t benefit from this new deduction, some will benefit a little, and some could get the full benefit.
Again, I’m not going to go into who could be eligible for the deduction or how to specifically calculate the deduction and/or limits. Instead, I’m going to focus on some specific definitions of the law that I think many need to be aware of including dental CPAs.
First, as some may know, additional regulations were just issued clarifying some aspects of the law and most importantly, closing some of the “suggested” loopholes that some “assumed” dentists could take advantage of. The main one was the “crack & pack” scheme whereby some “consultants” and ill-advised CPAs were suggesting that dental practice owners could create sister companies like management companies, lab companies, equipment rental companies and the like and carve off some of their practice profits that would be eligible for the new deduction even though the dental practice itself would not be. Well, that loophole was closed as most well-informed CPAs were expecting. Therefore, any “related” business that you own and provide the majority of their services to your practice will be treated the same as your practice.
Second, for those of you at or below the taxable income threshold, you need to make sure your wages are at the right level while also maintaining their reasonableness in the eyes of the IRS. Setting your wages appropriately could help you maximize the deduction whereas paying yourself too much might cost you some tax savings.
Third, if your taxable income is below the threshold, you might consider trying to add some income to the equation as you might be able to pay tax on only 80% of that additional income due how the calculation works.
Fourth, for those that have to do the calculations with their practice wages and unadjusted basis calcs, the “unadjusted basis” generally means the cost basis in your TANGIBLE assets immediately after they’re placed in service. So intangible assets, land, and additional first-year elections like Sec 179 and bonus depreciation are NOT considered.
Fifth, if you’re in a partnership, you need to make sure the income tax preparer of the partnership return allocates your share of the wages and unadjusted basis in the tangible assets so you can do the appropriate calculations on your individual income tax returns. Also, make sure you understand that if the partnership is deducting payments to you (the partner) as guaranteed payments, those payments to you are NOT considered QBI for you and the guaranteed payment DOES reduce your portion of the QBI that flows to you on a K-1.
Sixth, if you’re selling your practice and part of the sale contains “hot assets”, the gain attributable to those assets are QBI eligible as well.
So what can you do to potentially benefit from this new deduction if your taxable income is hovering just above the threshold for eligibility?
– Possibly place your real estate into a trust or family limited partnership shifting the net rental income to other family members that might be eligible
– Re-evaluate the benefit of a retirement plan and determine if the tax savings from the new deduction helps offset the staff costs of the retirement plan
– Consider larger deductions like donations, cash and/or non-cash donations
– Taking first-year depreciation deductions under Sec 179 and/or bonus depreciation (make sure you consider future years as well when looking at this)
– ONLY if you’re looking for riskier investments, consider oil & gas partnerships
– ONLY if you’re looking for income tax-driven investments, charitable conservation easement investments/deductions
– Talk to your dental CPA about other ideas to reduce your taxable income to get some benefit from this deduction
– Potentially looking at sister C-corps or trusts for your other dental practice services
There are many other aspects of the law that we as CPAs will continue to get educated on and you’ll hear terms such as aggregation, carryovers, netting, disallowed losses, NOLs, etc. which will come into play as well. Therefore, make sure your dental CPA is up to speed on this new deduction so that you can maximize your benefit if possible. If you own other businesses that are not deemed “Specified Service Trade or Business” (SSTBs) make sure you’re treating the net income from those businesses differently than your dental practice income as they ARE different under this new law.