February 25, 2021
Dental practices across the US have had a unique year filled with new operational practices, sanitization, PPE and protocols. All of these changes have led to added expenses in day-to-day operations, changes in the volume of patients and government-funded financial opportunities. For some dental practices, there has also been a need for capital investment.
Now with 2020 over, it is time to prepare your taxes. Many of these changes in 2020 are unique and new additions to your dental practice’s accounting. This tax season, you may find your dental practice ill-prepared for tax season. To help with your dental practice tax preparation, I wanted to share some tips and advice about what’s new, what tax incentives there might be and how the relief programs will impact your tax filing this year.
There are aspects of your 2020 business tax filing that can be impacted by what aid your dental practice leveraged in 2020. A common area that dental practices and many other small businesses utilized were the Paycheck Protection Program (PPP) loan and the HHS grants. The PPP loan provided a cashflow influx for many practices when your future may have been unknown. We shared in a recent blog the opportunities the new relief bill brings to businesses.
According to the IRS, the PPP loan is both forgiven and not taxable. And it also allows owners of S Corporations to increase their basis. This is a huge positive for the shareholder Doctors. The HHS grants are taxable, as well as state and county grants. Veterinary practices may need to add the amount of the PPP loan forgiveness to their financial statement income – but it is not taxable for income tax purposes. If not planned for, this potential add-back may increase the expected tax liability at filing time.
This is just one of the areas that COVID-19 may have impacted the bottom-line of your business as well as your annual tax filing. Many dental practices incurred several new expenses, loss of income and/or changes to their business model. All of these components can have a significant impact on your tax filing for 2020. It is best to consult with a specialized dental CPA or dental accounting firm when filing your taxes this year.
While this year may have been challenging for many dental practices, it also presented itself as a good time to plan for the future and capital investments. People won’t stop needing dentists to help care for teeth even in a difficult economy. Strategic investments in capital equipment can help your dental practice modernize, offer more services, and attract new patients. In turn, these investments can help you earn more income or replace any lost income you have.
If you have made a capital investment this year, there are tax implications to that investment. As part of your capital investment planning, there should be ample research into areas such as financial analysis, projected income potential, efficiency savings, financing vs cash purchase and many more factors.
An accountant or CPA specializing in dental practice management can help you analyze these factors. They can also help you understand the impact on your annual bottom line in addition to how it will impact your tax season this year and in years to come. This is also an opportunity to accelerate the related depreciation associated with the expense for your dental practice.
There are several deductions dentists should consider as part of their dental practice management efforts and structure. Dentists need to understand the opportunities and considerations for their practice when it comes to your company-sponsored retirement plan. Could a more robust 401(k)/profit-sharing plan provide a larger tax deduction while increasing the amount stashed away for retirement? Yes, and it could also provide a nice benefit to your staff at a time when retention is a challenge.
Another area that we all too often find missed deductions is all of your business-related expenses being paid for by the business. Are all of your dental expenses deductible, the answer is it depends.
The IRS guidance states that for expenses to be deductible, they must be “ordinary and necessary” in your dental business. This language can be very vague and your expenses should be revisited from time to time to make sure you are minimizing your tax liability. The knowledge of experienced dental specialized CPA will prove extremely valuable when it comes to your dental practice management.
There are also deductions you should consider such as continuing education for you and your team. The expenses associated with certification renewal, industry advancements and other CEU courses will fall into the Lifetime Learning Credit. It will be important to have the proper documentation when pursuing these credits. In addition to the tax credit your dental practice will receive, you will also advance your practice and help your team feel like valued members.
Working with an accounting firm that specializes in dental practices will be your biggest asset when using these programs along with reconciling them with your books. An accounting firm with knowledge of your business and these dentist-specific areas can be instrumental to your future success. They can also help you structure your practice effectively and efficiently.
If this all leaves you scratching your head, then it might be time to work with a dental accounting firm to help with your end-of-year accounting and taxes. The team at JLP CPAs provides general business accounting and tax services as well as specialized dental accounting services for dental practices. Finish your year strong and contact one of our dental CPAs today.
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