Income Shifting for Tax Benefit in Your Dental Practice
When it comes to taxes, are you overpaying in your dental practice? A large percentage of dental practices across the country are paying more than they need to, primarily because they are not taking advantage of strategies allowed by US tax code.
Run the numbers. If the sum of your federal, state, and self-employment taxes is more than 30 percent of your revenue, it’s a good idea to look into ways to reduce that number within legal requirements.
One strategy to consider, if you haven’t already done this, is to think about the legal entity in which your dental practice operates. Better yet, think about operating your practice using multiple entities, specifically corporations.
Setting up an “S” Corporation and a “C” Corporation—each with different fiscal year end—offers several benefits. One of these is income shifting, a strategy that can reduce taxable business income, which in turn lowers taxes. Income shifting with corporate entities can help a practice save as much as 15 percent in taxes compared to the same
When operating your practice with multiple corporate entities, your “S” Corporation is the core business, where all gross income goes. With income shifting, the “C” Corporation would receive money from the “S” Corporation to cover advertising, marketing, management, and other similar expenses. You would use the tax code deduction guide to record deductions in the “C” Corporation.
In a core business that earns $100,00 in gross income, for example, passing some of that income through to the “C” Corporation would reduce the taxable income in the “S” Corporation, possibly putting the entity into a lower tax bracket. The deductions taken in the “C” Corporation would lower that entity’s taxable income to close to zero.
Does this sound complex? There is some complexity to this strategy, but the benefits you can realize in tax savings could outweigh that consideration. You tax advisor will know how to set up multiple entities for your practice in a way that maximizes your benefits.
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