It seems that I get question after question regarding what is taxable for Dentist.  I created the following checklist to provide a broad stroke of what can be deducted in the Dentist business. Enjoy, and please feel free to comment below or ask a question!

1. Office Rent

You should know where your lease is. The IRS will sometimes ask to see it when they do an audit.

2. Uniforms

(This may be small $$ but it comes up so many times) The rule on clothing is this, if it is something that cannot be properly worn somewhere other than the person’s business office, then it is deductible.

3. Repairs

The costs of repairing your dental equipment, office, or business car are deductible. It is important that you save your receipts and I would pay by check rather than by cash.

4. Waste Removal

The costs of disposing of hazardous waste material are deductible. Save your invoices.

5. Utilities

Dentists tend to use a lot of water. The cost is deductible as are gas, electric and phone charges.

6. Cleaning Of Uniforms and the Office

The above item #2 and also the cost of cleaning your office are both tax deductible.

7. Alarm & Other Security Expenses

This would include security guards, watchdogs, alarm servicing and security cameras.  (I know, but I have seen a watchdog)

8. Office Expenses/Supplies

This can be broad, but some office expenses might include ink cartridges, pads, pens and pencils and many other items.

9. Stationery and Printing

The costs of printing business cards, stationery and bills/invoices are deductible. Printing flyers and brochures would also be deductible.

10. Dental Supplies

Almost all dental supplies are tax deductible. Need to be careful here because if the item is more in the nature of equipment rather than a consumed item, you will have to depreciate it.

11. Dental lab

All lab bills are deductible. (But is the percentage you are spending on lab fees?)

12. Education Courses

All education that improves your current professional skills is deductible. If the education qualifies you for a “different profession”, then it is not deductible.

13. Entertaining

WARNING: Only HALF the cost of wining and dining your business associates is deductible. Here is key: You must save your dated receipts and keep a record of who you entertained and why they are business related.

14. Business Gifts Up To $25 Each

Keep a list of names and why they are business related. Again, records are important!

15. Professional Dues & Subscriptions

The costs of joining professional societies and of magazines and books for your office are deductible.

16. Licenses

The costs of your various professional licenses are tax deductible.

17. Travel And Convention Expenses

The cost of business related travel and conventions are deductible. This includes meals (50%), lodging and train, plane, car or taxi. Your spouse’s expenses may also be deducted if (big “if” here) the spouse works for you.

18. Telephone (Regular, Cell, Internet)

When they broke up Ma Bell, they said our lives would get easier. I don’t think they anticipated cell phone bills, internet bills, long distance bills and local carrier bills. As long as your phone costs are business related, they are deductible.

Save the logs of your calls to show they were to business associates. (Don’t assume 100% here)

19. Patient Refunds

Keep records of all refunds to patients giving their name, date and the reason payment was made to them.

20. Malpractice Insurance

This very major expense is currently deductible.

21. Other Insurance

Workers compensation, some disability insurance, liability insurance and general business insurance are currently deductible.  (See your accountant regarding disability)

22. Professional Fees

The costs of lawyers, accountants, personnel people and architects are deductible if their work pertains directly to your business. Some personal legal fees are not deductible such as the legal costs to contest a will. (Even if you only pay $1 to a lawyer, they get a 1099 at year end)

23. Payroll/Payroll Taxes

Your staff’s gross payroll and the employer’s share of payroll taxes are deductible. This would include FICA expense, state and federal unemployment taxes.

24. Contracted Dentists/Temps

Outside dentists imply people who are not your employees but do contract work for you on a form 1099 basis. The IRS can, in some cases, really challenge this classification and is able to collect payroll taxes if it can show an employer-employee relationship exists.

25. Employee Benefits

Some of the benefits you give your employees such as health insurance or meals on premises are deductible by you.

26. Business Promotion

Expenses of promoting your business are deductible such as parties, signs and community projects sponsored by you.

27. Advertising

The costs of advertising are deductible including set-up and artwork. The cost of printing your brochures and flyers is deductible. (Hope you have something in place to track ROI)

28. Equipment Rental

Rental of equipment is deductible. (Sometimes people forget to pay sales tax on rental items.)

29. Depreciation of Dental Equipment

Depreciation is an accounting concept that accounts for the fact that equipment or buildings get older each year and therefore the taxpayer should get a deduction for this. The rules are very complex but it can be a major deduction for dentists since they use a lot of equipment.

30. Depreciation of Office Building

Depreciation on an office building is also allowed though you must depreciate buildings over a higher number of years than you may depreciate equipment.

31. Depreciation of Business Vehicles

You are allowed to depreciate qualified business vehicles according to complex IRS depreciation schedules. (Tricky for Dentist, but talk to your Accountant)

32. Amortization of Goodwill

The goodwill which you paid for when you purchased your practice can be written off over 17 years.

33. State and Local Income Taxes

The general rule is that state and local income taxes are deductible on federal tax returns. They are not deductible on state and local tax returns.

33. Sales Tax

Sales tax and or Use tax is deductible, and needs attention big time.  Most people understand collecting and remitting sales tax but Use tax NOT paid on items should be paid in the appropriate jurisdiction if no exemption.

34. Pension Expenses

Pension plans have evolved into a very complex area. I advise dentists to use a pension specialist. There is usually a pension plan that is right for you. Most require that you must cover your employees as well. The IRS has been known to audit dentists’ pension plans on occasion.

The 2010 Tax Relief Act extends for two years the Bush-era tax cuts, provides significant estate tax relief, and includes a two-year AMT “patch.” It also contains important new tax breaks for businesses and individuals, including 100% first-year write-offs of qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and a payroll/self-employment tax cut of two percentage points for 2011 for employees and self-employed individuals, plus a host of extenders for businesses and individuals.

Tax rates

The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

Standard Deduction

Under the Senate passed 2010 Tax Reform Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers for 2011. For marrieds filing a joint return (or surviving spouses), the standard deduction will be $11,600 (up from $11,400 for 2010); for marrieds filing separately, it will be $5,800.  This might affect your estimated income tax.

Phase Out of Itemized Deductions and Personal Exemptions

Itemized deductions of higher-income taxpayers will not be reduced when adjusted gross income exceeds certain thresholds. Also, a higher-income taxpayer’s personal exemptions will not be phased out under similar rules. For 2011 the personal exemption amount will be $3,700 (up from $3,650 for 2010).

Long Term Capital Gains Rates and Qualified Dividends

Through Dec. 31, 2012, long-term capital gain with a few limited exceptions, will continue to be taxed at a maximum rate of 15%. Qualified dividends will also be taxed at a long term capital gain rate rather than at ordinary income rates through this period.

Alternative Minimum Tax (AMT) “Patched” for Two Years

The Act includes a two year fix on the Alternative Minimum Tax which slightly increases the threshold beyond current levels at which the AMT would apply to taxpayers. This change protects millions of Americans who would have been subject to this tax for the first time.  This could lead to less complicated tax filing.

Estate Tax Relief

Under the Bush Tax cuts, the estate and generation-skipping transfer taxes phased out so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under old rules, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. The Senate passed 2010

Tax Relief Act makes the following changes:
• Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reduces the top rate from 55% to 35%.
• Allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010.
• For gifts made after Dec. 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
• Effective for estates of decedents dying after Dec. 31, 2010, allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse.

Incentives for Businesses to Invest in Machinery and Equipment

The Senate passed 2010 Tax Relief Act OKs the following major new incentives for businesses to invest in machinery and equipment:

1. A 100% write-off in the placed-in-service year of the cost of property eligible for bonus depreciation.. This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;

2. A 50% bonus first-year depreciation for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013;

3. For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 Also, off-the-shelf computer software will qualify for the Code Sec. 179 election if placed in service in a tax year beginning before 2013.

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security selfemployment taxes on all their self-employment income up to the same threshold. For 2011, the Senate passed 2010 Tax Reform Act gives a two-percentage-point payroll/selfemployment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:

• the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
• the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;
• increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;
• the above-the-line deduction for qualified tuition and related expenses;
• the provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010);
• look-thru of certain RIC stock in determining gross estate of nonresidents; and
• disregard of refunds in the administration of federal or federally assisted benefit programs.

Other Individual Tax Breaks Extended Through 2011

The following tax breaks for individuals that were set to expire at the end of 2010 will be extended through 2011:

• the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per month);
• treatment of mortgage insurance premiums as deductible qualified residence
interest; and
• exclusion of 100% of gain on certain small business stock.

Other Provisions Extended Through 2011

The list of energy-related provisions that will be extended through 2011 are:

• the $1.00 per gallon production tax credit for biodiesel, as well as the small agribiodiesel producer credit of 10 cents per gallon;
• the $1.00 per gallon production tax credit for diesel fuel created from biomass;
• the placed-in-service deadline for qualifying refined coal facilities;
• the credit for manufacturers of energy-efficient residential homes;
• the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process);
• deferral of gain on qualified electric utilities’ sales or dispositions of electric transmission property;
• the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well;
• grants for specified energy property in lieu of tax credits;
• the income tax credit for alcohol used as fuel;
• the reduced credit for ethanol blenders;
• the excise tax credit for alcohol used as fuel;
• the payment for alcohol fuel mixture;
• additional duties on imported ethanol;
• the energy efficient appliance credits (in new amounts and with new requirements);
• the Code Sec. 25C credit for energy-efficient improvements to existing homes, but reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under Code Sec. 25C are updated to reflect improvements in energy efficiency));
• the 30% investment tax credit for alternative vehicle refueling property.

The following disaster relief provisions will also be extended through 2011:

The list of energy-related provisions that will be extended through 2011 are:

• the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone (GO Zone);
• the placed-in-service deadline to claim additional low-income housing credits for buildings in GO Zones;
• tax-exempt bond financing; and
• the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the GO Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).

The Bottom Line

Educate yourself; get prepared; make some decisions for today and make some decisions for tomorrow BUT ABOVE ALL ELSE HAVE A PLAN.

If you like what you have read or have a question, please COMMENT below!

There were a bunch of rumors spread among the accounting community recently that the IRS has eliminated the capability for execs who operate their business as an S Co. to get distributions from their corporations instead of a wage or income.

On May 28th, 2010, The House passed the North American Roles and Closing Tax Loopholes Act of 2010 which has a provision that proposes to raise over $11 billion by tacking on payroll taxes to certain service pros who now split earnings as salary and draws (Ihope this is you!).  And by certain service pros, Congress particularly means those in “health, law, lobbying, engineering, design, accounting, actuarial science, performing humanities, consulting, athletics, investment recommendation or management, or brokerage” services.  If this change becomes law, it can add a 15.3% surcharge to the distribution portion of the earnings that S Corp Firm owners pay themselves. The Senate has taken this issue up in its June session.

S Corp Firms are entities where the net revenue from the company passes to the investors and gets taxed at the stockholders questionable rate of taxation.  S Enterprise owners typically receive revenue from their enterprises in 2 forms:. * An income or wage (W-2) and * A distribution (K-1).

The income/wage revenue element is subject to social security tax, medicare tax and unemployment taxes.

The distribution element none-the-less isn’t subject to these payroll taxes, which in several cases permits the entrepreneur to avoid 15% or even more in payroll taxes.  The govt wants the payroll tax bucks linked with an income and the pro wants to maximize the distribution portion of their revenue from the S Corporation to save payroll tax dollars.  Though used widely in tax planning, this tactic has lately been dubbed the “John Edwards loophole” as the previous presidential contender used it to pay himself millions from his S firm.

Edwards paid himself a $360,000 income from his S corporation, but then took a further $26 million from the firm that was subjected to revenue taxes, although not work taxes.  The loophole which is totally legal likely saved Edwards at least $500,000 in taxes. (I hope you read that example again if you are not grasping this strategy)

So what should execs do today who are probably impacted by this change?  At that point it is a ‘wait and see ‘ issue on the law. S Enterprise owners must nevertheless, take fast steps to get in accordance with the present laws relative to the compensation they receive from their enterprises. The IRS needs S Enterprise owners to pay themselves a fair income from their business.  Sadly, there is not any clear standard from the IRS the entrepreneur can rely on to make this determination.

The IRS does offer some steering in its audit manual that covers this issue and they have listed these factors the auditor should gauge when deciding the reasonableness of an employee’s compensation:

The employee’s contribution to the profit making of the business.

The time gave by the worker to the business.

The business conditions generally and regionally.

The personality and quantity of responsibility of the employee.

The time of the year when compensation is determined.

The relationship of the stockholder/officer’s compensation to stock holdings (ratio).

The amount paid by similar enterprises in similar areas to similarly qualified workers for similar services.

You could be asking why it is so crucial to address this compensation issue today outside the contemporary House legislation that just passed.  The rationale is that the IRS has identified this issue as an important area for increased enforcement which interprets into higher probabilities of audit.  The Service has upgraded its PC selection technique where it can electronically compare the quantity of officer compensation reported on the tax estimate with the quantity of distributions the stockholder receives.  Pros with S Corporations that pay themselves an insignificant income are going to get selected for audit.  Additionally, the IRS in March of this year began a 3 year work tax audit program where six thousand companies will be at random selected for audit particularly targeting work tax issues.

We haven’t seen these sorts of audits in nearly twenty years.  Reasonable compensation issues have been in public identified as one of the key areas of audit stress by the Service in this program.  And eventually, there are many tax court cases matriculating thru the system where the IRS is making an attempt to re-characterize distributions as wage compensation.

So far, they’ve been successful in these legal efforts.

Due to the increased stress on work tax issues by the Service, firms must take the following speedy steps to guarantee their compensation formulas are in compliance:

(a) Document the compensation schedule in your company records

(b) S Companies should hold a board meeting at the start of the year with resolutions prepared that approve the compensatory plan for the officials

(c) Pros should pay themselves a fair income on the same cycle that their staff employees are paid on

(d) No more grossing up the salary at year end (which I have regularly seen happen in medical care practices)

Executives ought to have a compensation study performed that identifies what other similar professionals are being paid with consideration given to all of these factors.

Amount to time the pro devotes to the practice.

Whether the pro acts in a handling capacity or actually performs the work.

The final analysis is that across all levels of govt we are in an environment of increased regulation and enforcement.

For the pro that suggests higher revenue taxes, increased probabilities of audit and higher degrees of scrutiny in all areas of business.

With proper planning, many of the issues we face can be controlled or mitigated.  Please feel free to call my office at 502-713-6232 for a complementary consultation of how your particular compensation package fits into the various rules and guidelines.  Further examination of your business not only may help your business better sustain its compensation plan; it may also help you take advantage of other compensation arrangements and opportunities.

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The following article is a fundamentally sound bit of advice from the managing editor of PowerHomeBiz.com, Isabel M. Isidro.  Enjoy!

Is there a way to determine whether you can be a successful entrepreneur, or you are better off to work for somebody else? Alas, there is no formula for success. However, most successful entrepreneurs share these ten characteristics. Check if you possess any one of them:

9. Persevere and have faith. No one said that the road to success is easy. Despite your good intentions and hard work, sometimes you will fail. Some successful entrepreneurs suffered setbacks and resounding defeats, even bankruptcy, yet managed to quickly stand up to make it big in their fields. Your courage to persist in the face of adversity and ability to bounce back after a temporary disappointment will assure your success. You must learn to pick yourself up and start all over again. Your persistence is the measure of the belief in yourself. Remember, if you persevere, nothing can stop you.

10. Discipline yourself. Thomas Huxley once said, “Do what you should do, when you should do it, whether you like it or not.” Self-discipline is the key to success. The strength of will to force yourself to pay the price of success – doing what others don’t like to do, going the extra mile, fighting and winning the lonely battle with yourself.

Successful entrepreneurs possess an attitude of openness and faith that you can have what you want if you can simply envision it as the first step on the path of action to acquiring it. Management gurus have taught us the power of visualization – seeing yourself in your mind as having accomplished your dreams. If you want to be a successful writer, envision yourself signing books for a throng of people who have lined up to have your autograph. If you want to be rich, picture yourself in luxurious surroundings holding a fat bank account. And the process of envisioning success for you should be a constant activity! You need to think that you are successful (or will be one) every single waking hour. A personal development coach shared me her secret to help her continuously visualize her goals for the moment: when climbing stairs, recite your goal with every step you take. So if you want more money, say “I will have money” in every step of the stairs. This technique will reinforce your goal and keep it fresh in your consciousness.