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Tax Reform And Your Dental Practice

Tax Reform Provides New 20% Deduction

The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.  Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.

You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.  When can you as a dental practice owner qualify for this new 20 percent tax deduction with almost no complications?  To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of

  • $315,000 or less if married filing a joint return, or
  • $157,500 or less if filing as a single taxpayer.

Example. You are single and operate your dental practice as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).

If you operate your dental practice as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.

How the 20% Deduction Works for high-earning Dentists

Getting just a little more technical, the out-of-favor “specified service trade or business” group includes any trade or business

  • involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
  • where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or

As a member of the out-of-favor group, your Section 199A deduction on your out-of-favor business is zero when you have taxable income of more than

  • $415,000 if married filing a joint return, or
  • $207,500 filing as a single taxpayer.

As always, if you have questions about the new tax laws as they apply to your dental practice, do not hesitate to contact HP Dental Business Advisors.  We offer free consultations and loads of free content for you to use to put the tax code to work for you!