For owners of dental practices, dental associates receiving 1099 income, and independent dental contractors, understanding tax deductions and how to use them strategically, is key to reducing your tax liability while ensuring compliance.
For more of an idea about tax write offs for dentists such as car, travel and home office deductions, and how they can be used to your advantage, here is a quick guide:
Car deduction
For dental professionals who use their car for driving related to work, such as traveling to labs, between offices, or to dental-related events, it might be possible to deduct some of these costs.
Generally, you’ll select one of the two methods below:
- Standard mileage rate – a flat rate per business mile factoring in gas, routine repairs and depreciation at a basic level.
- Actual expense method – your real costs, such as fuel, insurance and repairs, are tracked before your business-use percentage is applied.
Note that the type of vehicle used has a role to play too, and strong documentation is a must for the IRS.
A dental tax expert can help you determine which method would be most beneficial for your specific circumstances, and help you turn everyday driving into tax savings that count.
Home office deduction
The home office deduction is frequently misunderstood, which is a shame as it can form part of a powerful tax strategy.
Dentists often believe that if they handle some of their paperwork from home occasionally, this means that they can claim a portion of their home expenses. However, this isn’t the case. Qualifying for the home office deduction means that the space in your home must be a dedicated one, and used solely for business purposes on a regular basis.
The IRS also demand proof for their ‘principal place of business’ test, that the home office forms an important part of your business operations, rather than it just being a comfortable and convenient place to catch up on paperwork. For those whose main role takes place at a dental office, they’ll need to provide evidence of the home office being used to take care of things that can’t be done from there, such as scheduling, managing finances or marketing.
Once all relevant IRS tests have been passed, you can opt from the two methods below when calculating your deduction:
- Simplified – a flat rate per square foot is used
- Actual expense – a portion of your utilities, rent, mortgage interest and property taxes can be deducted based on how much of your home is devoted to your business
A dental tax professional can help you decide if this particular deduction makes sense for you.
Travel deductions
Travel expenses can often mount up for dental professionals, but for trips in which business is the primary function, many of these costs are deductible. Deductions for transportation and lodging, as well as registration fees and 50% of meals during work travel are allowed by the IRS, provided the trip takes you away from your ‘tax home,’ meaning that you had no choice but to stay overnight somewhere. As with all deductions, detailed records will be required as proof for the IRS.
For owners of dental practices, having travel expenses reimbursed through the business by way of an accountable plan, might be worth considering. In this way, deductions can be claimed at practice level, and the reimbursement isn’t considered for personal taxable income. Talk to a dental tax specialist about writing up an accountable plan policy and reimbursement form.
Specific tax planning for orthodontists and oral surgeons is also worth considering if you’re an even higher earner than other dental professionals.
While you may think that tax planning is as simple as keeping separate records of your business and personal expenses, there are other considerations to be aware of, and reducing your tax liability as much as you possibly can while being in compliance with all IRS regulations, is made much easier by consulting with a dental tax professional.