Year-end strategies for dental practice owners to save on taxes

As the year comes to a close, many dental practice owners are looking for ways to reduce their taxable income and maximize savings before year end. With the right tax strategies, you can significantly lower your tax bill. Here are some key tax-saving strategies that every dental practice owner should consider in 2024. This post is brought to you by Duckett Ladd, which provides accounting, tax, and financial planning for dental practices.

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1. Take Advantage of the Augusta Rule: Rent Your Home to Your Practice

The Augusta Rule allows you to rent your home to your dental practice for meetings or events for up to 14 days per year, without having to report rental income.

Here’s how it works for a dental practice owner:

The rent you charge the practice becomes deductible to the business as an expense, and you won’t be taxed on the rental income on your personal tax return (as long as the rental period doesn’t exceed 14 days). You will need to report the income on your Schedule E, but you will also zero it out through an adjustment.
This strategy reduces taxable income for your dental practice while providing you with tax-free income from the rent of your home.
Tips: Be sure you have a legitimate business purpose for the rental, keep a rental agreement, and issue a 1099 to yourself if more than $600 in rent is paid.

2. Home Office Deduction: Maximize Your Write-Offs

If you run your dental practice from home or use a portion of your home for administrative duties, you may be eligible for the Home Office Deduction. This deduction allows you to write off a portion of your home expenses, including mortgage interest, utilities, insurance, and property taxes.

Here’s how it works:

The space must be used regularly and exclusively for business purposes.
You can deduct a percentage of your home expenses based on the square footage of your office versus the total square footage of your home.
There are two methods for calculating the deduction: the Simplified Method (which gives you a flat $5 per square foot deduction up to 300 square feet) or the Regular Method (which involves calculating actual expenses).
Additionally, establishing a home office could also open up the potential for additional mileage as you now may have another principal place of business.

3. Charitable Contributions: Give Back and Save on Taxes

Making charitable contributions before the year ends can be an effective way to reduce your taxable income while supporting causes that matter to you.

Here’s how it works for dental practice owners:

Cash Donations: Donations made directly to a qualified charity are tax-deductible. This can include cash, checks, or credit card payments. You can deduct up to 60% of your adjusted gross income (AGI) for cash donations in 2024. Additionally, some charitable organizations offer state tax credits for purchase. State tax credits offer a dollar-for-dollar reduction of your state tax liability, and aren’t limited by your AGI. Check with your local organizations to see if they offer any tax credit programs in your area.
Non-Cash Donations: You can also donate equipment, supplies, or other assets from your dental practice. These items must be in good condition, and you may need an independent appraisal for larger donations. Non-cash donations are typically deductible at fair market value.
Bonus Tip: If you’re over the age of 70½, you can also make Qualified Charitable Distributions (QCDs) from your IRA directly to a charity, which can count toward your Required Minimum Distribution (RMD) without being taxed.

Charitable contributions can lower your taxable income while benefiting your favorite causes, so consider giving before the year ends to maximize the impact.

4. Section 179 Deductions: Accelerate Deductions on New Equipment

If your dental practice is planning on purchasing new equipment or making office improvements before the year ends, you can take advantage of Section 179 of the IRS tax code. This allows you to immediately deduct the cost of qualifying property, up to $1,220,000 for 2024.

Here’s what you need to know:

Section 179 applies to new and used equipment purchases, as well as improvements made to your office or dental clinic.
The total deduction begins to phase out if you place in service more than $3.05 million worth of section 179 property in a given year (for 2024).
Tip: Review your practice’s equipment needs and take advantage of Section 179 if you're planning any upgrades or replacements in 2024 or the near future.

If you're planning to purchase equipment, GroupUps can help you get the right equipment at the best price. Be sure to share your shopping list for the next 12-18 months.

5. Pass Through Entity Tax Election

Some states allow Partnerships and S Corporations to elect to pay state taxes at the entity level which in return provides a federal deduction for the entity.

Due to the State and Local Tax (SALT) limitation implemented by the Tax Cuts and Jobs Act of 2017 (TCJA), many states have introduced a workaround to provide some relief for certain taxpayers. The Pass-Through Entity (PTE) tax allows the entity to pay the state income tax due (on the dental practice income in this case), which is typically paid by the shareholders or partners at the personal level. By having the entity pay the state income tax, it allows for a deduction in the federal income reported to shareholder or partner.
Additionally, states offer a PTE tax credit for the shareholder’s/partner’s personal return. The state taxes paid flow to your personal return, reducing the amount of taxes owed at the state level.
Tip: Be sure to check if this is applicable to your state and the specific requirements as they vary by state.

Conclusion: Plan Ahead for Year-End Tax Savings

Maximizing tax savings before year end requires careful planning and an understanding of the different tax strategies that may be applicable to you. By taking advantage of strategies like the Augusta Rule, home office deductions, charitable contributions, Section 179, and others, you can reduce your taxable income for 2024.

Tax laws can be complex and each person’s situation is unique; you should always consult your CPA/tax professional. They can guide you through these strategies, ensuring you're making the most of the opportunities available to you. If you're looking for a CPA/tax professional, the team at Duckett Ladd can help you navigate your options and create a tax plan that works for you.