Here we’re taking a look at what is effectively a year end tax strategy for dentists, or business owners in general.
If your business has generated more revenue than you anticipated toward the end of the year, you’re likely interested in minimizing your tax burden. The government still offers generous depreciation methodologies that are available at year-end. Under Code Section 179, you can take a full deduction for certain equipment purchased during the year.
However, this doesn’t mean we encourage purchasing expensive equipment solely for the sake of tax savings. Remember, any profit you have means you retain roughly 65% to 75%, while the government takes 25% to 35%, depending on your tax bracket. For example, if you spend $100,000 to save $35,000 in taxes, the $100,000 is gone. On the other hand, if you pay $35,000 in taxes on $100,000 of profit, you still retain $65,000.
That said, if you’re already planning to purchase certain equipment and experience an unexpectedly high-income month—perhaps due to additional procedures—it may make more sense to act on those purchases. If you don’t expect the same income level next year, buying the equipment now and taking advantage of depreciation could be a smart move.
Year End Tax Strategy for Dentists: Using Retirement Plans
You likely have a retirement plan, whether it’s a SIMPLE IRA, SEP IRA, or 401(k). If your year-end income looks better than expected—or even as good as anticipated—consider making additional contributions to your retirement plan. These contributions provide the same dollar-for-dollar reduction of net income as depreciation, but with the added benefit of paying that money to your future self rather than to another company.
Review the type of retirement plans you have and explore whether you can fund larger amounts than originally planned. This strategy allows you to lower your taxable income while investing in your financial future.
Year End Tax Strategy for Dentists: With Children
If your children are of working age, employing them in your office and paying them a bit more toward the end of the year can help reduce your tax burden. The standard deduction for 2024 is $14,600 for single filers. This creates a tax arbitrage opportunity: you transfer income from your higher tax bracket to your children, who may not owe income tax at all, depending on their total earned income for the year.
If your children have no other income, this is a great way to teach them responsibility while also lowering your tax liability. Ideally, this strategy should be implemented throughout the year, but if you didn’t anticipate earning as much as you did in the last quarter, it’s an excellent year-end option.
Another significant benefit is that, as you pay your child, they can start funding a Roth IRA. This offers the added bonus of teaching them about investing and the importance of planning for their financial future. By funding a Roth IRA, you’re giving your child a head start on retirement savings while also fostering meaningful conversations about investing and financial literacy.
Year End Tax Strategy: Using Pass-Through Entity Tax Election
Many states allow small business owners to operate through a pass-through entity, enabling them to pay state income tax liabilities through the business. This applies to entities such as partnerships filing a 1065 or LLCs electing to file as an S-Corporation on an 1120-S return. Utilizing this strategy reduces the business’s taxable income, which in turn lowers the owner’s federal income tax obligation.
However, this tax saving strategy for dentists isn’t universally beneficial, as each state charges pass-through entity taxes at its highest tax bracket. It’s a case-by-case decision that depends on your state’s tax structure and your overall financial situation. At Burgmaier & Associates we perform these calculations for our clients. By August we know whether or not they’re a candidate, and if so we are beginning to fund that. By December we’ve sorted out what that payment needs to be, and pay it by the end of the year.
For example, consider a business in New Mexico with $200,000 in earned income before this tax is applied. New Mexico’s pass-through entity tax rate is approximately 8.6%, resulting in a state tax obligation of $12,000. By electing to pay this tax through the business, the taxable income is reduced to $188,000 for federal income tax purposes. If the business owner falls into a 32% federal tax bracket, this reduction represents substantial savings on federal taxes.
Keep in mind that the business will owe the state tax regardless of whether it is paid through the business or personally. The key consideration is whether you’re in a higher federal tax bracket where this strategy provides meaningful savings.
This article was recreated from the episode we recorded with Eric Burgmaier in December. You can watch/listen to the full episode or check out all of our Getting Down to Business podcast episodes in either video or audio format.
