Consider potential cost-saving tax strategies for your dental practice as the year draws to a close.
Key insights
- Use the Section 179 deduction or bonus depreciation to speed up expensing of new or used equipment.
- An HSA is a great way to save tax-free money to use for medical expenses.
- Talk to your tax advisor to determine the best possible retirement account for your practice.
- If you plan on sending your kids to college, consider contributing to a 529 plan.
Need help with year-end tax strategies?
For dental practices, another year is coming to a close, which means now is the time to review your tax strategies. There may still be opportunities to adjust your tax plan and save money. Ask yourself the following questions — and consider the subsequent guidance — to uncover some of those potential opportunities for 2020.
Did you purchase equipment this year?
Identify ways to speed up how you expense your new equipment to help lower your taxable income. Review the Section 179 deduction, which allows you to immediately expense up to $1,000,000 on the purchase of new or used equipment. However, if you purchased more than $3.5 million in equipment there are limitations, so call your accountant to discuss your planning options.
Instead of — or in relation to — Section 179, use bonus depreciation to speed up expensing new or used equipment. For 2020, you can write off 100% of the equipment’s value, and if you elect not to take bonus depreciation, you can expense the remaining amount over the Modified Accelerated Cost Recovery System (MACRS) life of the asset. If you use bonus depreciation, use this method on all assets with the same IRS class life that was put in place during the year. You may elect out of taking bonus depreciation.
Did you purchase, construct, or renovate an office building?
Consider performing a cost segregation study. A cost segregation study may help reclassify the cost of the building to shorter depreciation class lives or even allow you to expense some costs immediately using bonus depreciation.
Did you contribute to your health savings account (HSA)?
With the increasing numbers of high-deductible health insurance plans, consider using an HSA. For 2020, the maximum amount you can contribute to your HSA is $7,100 for family coverage and $3,550 for single coverage, which provides you with tax-free money to spend on medical payments. If you are over age 55, the above amounts increase by $1,000.
Before you contribute to an HSA, make sure you’re in a high-deductible health insurance plan, you’re not on Medicare, and you’re not claimed as a dependent on another person’s return.
Have you maximized your retirement accounts?
If you are deferring wages into a 401(k) plan, for example, contribute as much as you can. The maximum amount you can defer to your 401(k) plan for 2020 is $19,500; however, if you’re over the age of 50, you can contribute an additional $6,500 on top of that $19,500.
Don’t have a retirement plan, or want to put additional amounts away for retirement? You can contribute to an Individual Retirement Account (IRA); the maximum amount anyone under the age of 50 can contribute for 2020 is $6,000. Once you reach age 50, you can contribute another $1,000 for a total of $7,000. Contributions to an IRA, even a nondeductible IRA, could be an option to help you avoid the 3.8% investment tax on your investment income.
Talk to your tax advisor if you have additional retirement account questions. They can help you determine if you should:
- Make Roth deferrals or pre-tax deferrals
- Save additional money through a “backdoor” Roth conversion
- Use a savings incentive match plan for employees’ (SIMPLE) IRA plan
- Look into a safe harbor 401(k)
- Consider a cross-tested plan
- Install a cash balance defined benefit plan
These are all great scenarios to consider.
Are you only able to take the standard deduction on a donation to a charitable organization?
Think about doubling up on donations for 2020 and 2021 by accelerating 2021 donations into 2020.
Make donations for appreciated stocks or land, instead of just cash. The deduction you receive on your tax return is the fair market value of the property donated (if held long-term), and you won’t be taxed on the gain. This is a great approach to get a tax deduction if you’re thinking of ways to avoid taxes on disposing of appreciated property. In order for your charitable donation of cash or property to be tax-deductible, make sure you donate to a 501(c)(3) organization.
You can go one step further and potentially create a donor-advised fund, then make a donation in 2020 and take a tax deduction in 2020 for future years of donations. The fund would make donations to a 501(c)(3) in the future when you can take the standard deduction.
Plan on sending your children to college?
Practice owners can also consider contributions to a 529 plan. A 529 plan is set up as a tax savings plan because the earnings on the amounts contributed are tax-free — as long as the distributions are used for qualified educational expenses. Depending on the state you live in, you may receive a tax benefit if you contribute to that state’s 529 plan.
For example, if you contribute to Wisconsin’s 529 plans, you can receive a deduction on your Wisconsin tax return. For 2020, the deduction would be a maximum of $3,340 per beneficiary’s account you fund. Any contribution above that in 2020 would carry over to the following years.
How we can help
There are a variety of different year-end tax strategies to consider for your dental practice. Each practice has its own needs, so weigh all of the potential options carefully. If you need guidance on any of these strategies, reach out to our team to discuss. We can provide assistance to meet your specific needs.
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