Recently, as I’ve been reading through some of the dental-specific websites like Dentaltown or FB groups, the usual topic of year-end practice spending for tax planning purposes are starting to pop up with mixed feedback.
It’s a fairly common year-end planning strategy that many CPAs will throw out there (as a general concept), that is, to spend down some of your taxable income and attempt to defer that income into the following year. Unfortunately, without proper planning and guidance, some people take it upon themselves to do it because it sounds good without understanding its real impact, which could backfire on them.
How could this backfire you ask? The strategy can work well IF you’re taking these deductions in the current year at a tax bracket that will likely be higher than next year or even the next several years and therefore, deferring income into a future year at a lower tax bracket. However, sometimes people are deferring income into the following year when their income tax bracket will likely be higher and that winds up being a terrible strategy.
Now, common sense should tell us that IF year-end spending makes sense you should ONLY spend on expenses you’ll have to pay sometime in 2021 OR furniture and equipment you’re planning on buying soon anyway. It never makes sense to spend money on anything you don’t need or want…that’s a given.
One recent FB group thread really stuck out to me though, here’s why:
The OP posted that they’ll likely be expanding in 2021 and insinuating that they would likely have a lot of deductions in 2021. To me, that’s an indication that they’ll be in a lower income tax bracket in 2021 vs. 2020. They posted that their CPA suggested a year-end spending strategy as a way to shift some income into 2021 (or bring some 2021 expenses into 2020, a higher tax bracket year). Again, I assume because their tax rate in 2020 would be HIGHER than 2021. So the OP asked what items or technology could be purchased in 2020 that could be easily moved in 2021.
I was truly amazed at the responses of other dentists suggesting it was bad advice and that the OP should fire their CPA. The post was maybe 50 words long and there’s NO WAY any of these dentists could truly know the entire story as to why this advice was given and nor should they have simply assumed it was bad advice. Many of them seemed to only read the part about “year-end” spending and missed the aspect of the OP expanding in 2021. I saw posts like “bad idea”, “dumb idea”, “makes no sense” and so on. I tried my best to reply to a few that A. none of us know the Ops entire situation and B. when reading the post in its entirety, it seemed like a prudent strategy and I explained why.
The bottom line is this – year-end tax planning is always a good idea and usually a better idea when done with a CPA that understands your specific situation and considers MORE than just the current year. If that year-end planning includes a strategy of spending down the current year income, great. Sometimes a better strategy is to spend less and defer those business deductions into the next year at a higher income tax bracket OR pull income from 2021 into 2020 at a lower bracket. There is no one size fits all. Every situation is different even though many might wind up using the same strategy to minimize their overall income tax burden.
Good Luck through the rest of 2020 and happy year-end tax planning!
ABOUT TIM LOTT
Tim provides consulting services to dental professionals and practices. He provides expertise in start-ups, mergers, transitions, tax and retirement planning, financing assistance and budgeting. Some of the specific areas of consulting are associate, partner, and shareholder arrangements; practice management, practice purchase, sales, buy-ins, and buy-outs and related tax issues.