Dentist Tax Planning
Dentistry combines employee wages, associate or owner pay, and a practice that carries heavy equipment and overhead. That mix creates planning opportunities, and also some common mistakes, at each stage of a career.
Planning by career stage
| Stage | Typical income | Planning focus |
|---|---|---|
| New graduate or associate | W-2 or 1099 pay, often with production-based compensation | Estimated taxes on 1099 income, retirement plan options through the employer, tracking CE and licensing costs |
| Transition to ownership | Mix of salary and practice profit, with loan payments and buy-in costs | Entity selection, owner salary, handling buy-in payments, and cash flow for estimated taxes |
| Established owner | Practice profit plus owner pay | Equipment and depreciation timing, retirement plan design, and entity review as profit changes |
| Approaching sale or retirement | Profit and sale proceeds | Structuring the sale of the practice or the sale of your interest, and sequencing retirement distributions |
Equipment and capital purchases
Dental equipment, such as chairs, imaging systems, CAD/CAM units and lasers, is often large enough to matter for taxes. Federal law allows several ways to recover the cost, including bonus depreciation and Section 179 expensing, each with limits and phase-outs. Whether to use them in a given year depends on your income that year and your plans for the following years. Buying equipment only for a tax deduction, without a clear business need, is rarely a good decision.
Associate-to-owner transitions
Buying into a practice usually means taking on a loan for goodwill, equipment or real estate. Interest on that loan, depreciation on purchased assets and the owner's salary all change the picture. Many dentists also keep working as an associate in a second practice, which can create both W-2 and 1099 income in the same year.
- Review the purchase agreement for how goodwill and equipment are valued, since that affects future depreciation and gain on sale.
- Plan estimated tax payments for the year you move to ownership, since withholding from an employer may stop.
- Document any associate contract payments and expenses separately from practice costs.
Entity choice for dental practices
Dental practices are often organized as S corporations, LLCs taxed as partnerships or as S corporations, or professional entities, depending on state law. An S corporation can reduce self-employment tax on profit above a reasonable owner salary, but the salary must reflect the work performed and the compliance costs must be justified by the profit. Some states also limit who can own a dental practice, which can narrow the choices.
Retirement planning
Dentists who own their practice may use a solo 401(k), a SEP IRA, a 401(k) with profit sharing, or, for steady and high profit, a cash balance plan. Associates usually use the employer's plan. Coordinate contributions with your entity's salary and estimated tax payments, and confirm deadlines before year-end.
Deductions dentists often miss
- Continuing education, including travel to qualifying courses, when it is related to your practice
- Licensing and state dental board fees, and professional dues
- Malpractice and other business insurance premiums
- Laboratory fees, supplies, and software subscriptions for the practice
- Home office costs for administrative work, if you qualify
- Mileage and travel between practice locations, with a log
Dental tax planning benefits from a CPA who understands practice finances. PremCPA.com offers professional CPA services, SmallTax.com offers tax help for small businesses, and RealPayroll.com offers payroll services for practices with staff.
General educational information only, not tax, legal or investment advice. Deductibility, depreciation rules and retirement limits depend on individual facts and change over time. Consult a qualified tax professional before acting.