Dentaltown May 2018 - 107

While practice expansion seems like a solid investment, the new
tax laws have the potential to complicate tax considerations
for business owners, especially when considering equipment
expenditures, partner earnings and business structure.
Most independent practitioners operate as a pass-through entity, which includes
Schedule C, partnership and S corporation. The new tax laws allow for a "pass-through
income" deduction of up to 20 percent, although higher earners might qualify only for a
partial deduction-or none at all.
According to Cataldo Financial & Consulting Group in Philadelphia, young practitioners
and married practitioners in single-income households will likely benefit most from this
change.
For multipractice owners who cannot take this deduction, changing the legal structure
of the business to qualify for the lower, 21 percent corporate tax rate might seem beneficial,
but the advantages aren't so straightforward. For example, there's commonly a cost to
incorporate the business, and assets and profits may be subject to higher taxes despite the
lower corporate tax rate, meaning top earners could be further penalized.
"Even though the corporate tax rate is reduced, the shareholder dentist would need to
withdraw funds through payroll or a taxable dividend," says Angelisa Cataldo, a CPA at
Cataldo Financial & Consulting Group. "A salary will be taxed at individual income rates,
while a dividend will be taxed at 15 percent or 20 percent plus net investment income tax for
certain taxpayers. This is a critical consideration because the practice income is usually the
main income stream for a practice owner. In a C corporation situation, a dentist could pay
a flat 36 percent to 44.8 percent on practice income taken as dividends, as a result of double
taxation on the corporate profit and the subsequent withdrawal of income as a dividend."
Dentists planning to add equipment or technology to their practice will need to think
about 2018 tax implications as well. The tax overhaul increases bonus depreciation of
assets put into service to 100 percent, including used assets, and is automatically applied
to taxpayers' filings. Section 179 deductions for equipment placed in service increased to
$1 million, with a phase-out beginning at $2.5 million.
"Taxpayers can take only one of these deductions, so they need to consult with their
tax adviser about whether to elect Section 179 or bonus depreciation," Cataldo said.
These adjustments can have a positive impact for dentists considering expanding their
practice or upgrading the technology in older acquired practices that will require significant
equipment expenditures. Cataldo noted that there could be further complications with
using Section 179 in the form of a tax penalty if a dentist decides to incorporate the business
and is paying loans for equipment that no longer has asset basis.
Consider this example: A practice owner purchased $300,000 in equipment in 2017
for which she claimed Section 179 and took out a $200,000, 7-year term loan. In 2019, the
loan balance is $175,000 and the practitioner decides to convert her sole proprietorship to
a C corporation. This transaction would result in $175,000 in taxable income because the
IRS views the transaction as if the practice owner contributed assets of no value to the C
corporation while transferring $175,000 of liabilities to the corporation.
The bottom line is that even though the new corporate tax reductions sound enticing,
dentists should discuss their individual potential savings with their tax adviser and attorney
before making any capital expenditures or acquisitions. ■

dentaltown.com \\ MAY 2018

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