Did you know that many successful dental practice owners end up paying over 40% of their income in taxes?
Between federal, state, and local taxes—plus payroll, property, and sales taxes—it’s no wonder the numbers quickly add up.
That’s almost half of your income disappearing each year!
But here’s the good news: there are smart ways to lower that number. And we’re not just talking about the typical deductions your CPA might suggest.
These are lesser-known tax strategies for dentists that are easy to put into action, especially with the right dental tax experts by your side.
Let’s look at a few of our favorites.
Set Up a SEP IRA to Fast-Track Your Retirement
Your practice can deduct contributions made to a SEP IRA (Simplified Employee Pension) as a business expense, which helps lower its taxable income.
If you’re the only long-term W2 employee (employed at least 3 out of the last 5 years), you can make contributions to your SEP IRA up to 25% of your compensation or $69,000, whichever is lower–without needing to match for other staff.
For example, if your W2 salary is $120,000, you can put $30,000 into your SEP IRA, earning a $30,000 tax deduction. At a 30% tax rate, that deduction saves you about $9,000, effectively putting that money back into your pocket.
In order for this exclusion to work, the other employees should be under 21, haven’t worked for at least 3 out of the last 5 years, or earned less than $750 for the year.
And there’s flexibility: you can make your contributions anytime before your business tax return deadline, so you could still get a 2024 tax deduction if you contribute in early 2025. It’s a win-win for your retirement savings and your tax bill!
Use the 14-Day Rental Rule to Shift Taxable Business Income to Tax-Free Personal Income
The Augusta Rule might sound a bit technical, but it’s actually a simple and clever way to save on taxes. Here’s how it works:
- Rent Your Home Tax-Free at a Fair Market Rate: The IRS allows you to rent out your home for up to 14 days a year without having to report that income. If you hold board meetings at your house, you can charge your dental office a fair market rent, and all that income is tax-free.
To keep this arrangement legitimate and within IRS guidelines, make sure the rent you charge is reasonable—similar to what someone else would pay to rent a comparable space for the same amount of time.
- Keep It Simple and Documented: Have a basic agreement that outlines the rental terms, rate, and the purpose (e.g., board meeting for your practice).
- Business-Only Use: During the rental period, your home should be used exclusively for business activities—no personal use during that time.
- Stick to the 14-Day Limit: Staying within the 14-day limit keeps all the rental income tax-free. Anything beyond that would turn it into taxable income.
Qualify for the Qualified Business Income (QBI) Deduction to Reduce Your Taxable Income
Introduced as part of the Tax Cuts and Jobs Act in 2017, the QBI deduction can lead to substantial tax savings if you qualify.
- Who’s Eligible? To claim the QBI deduction, your dental practice must be a pass-through entity, such as a sole proprietorship, partnership, S corporation, or LLC. C corporations aren’t eligible for this deduction.
- How It Works: If you are a single filer and your taxable income is $191,950 or lower, you may claim the full 20% QBI deduction. If your income is between $191,951 to $241,950, you may claim a partial deduction.
If married filing jointly and earn an income of $383,900 or less, you can also claim the full 20% deduction. Partial deduction applies for you if your income is between $383,901 to $483,900.
- Combine Strategies to Qualify: If your income is near or within the phase-out range, you can use other strategies—like contributing to a SEP IRA or utilizing accelerated depreciation—to bring your taxable income down and still qualify for the full deduction.
Make Your Family Vacations Tax-Deductible Business Expenses
The key to this strategy is to make sure that the primary purpose of your trip is business-related, like attending a dental conference, meeting potential vendors, or doing research relevant to your practice.
The majority of your trip days need to be for business.
If you’re traveling for a week, make sure at least 4 of the 7 days are dedicated to business activities (travel days count as business days). You can deduct travel expenses such as airfare, hotel, ground transportation, and meals, but remember to keep those receipts!
For international trips, there’s a neat one-week rule: if your business trip lasts a week or less, you can deduct the entire cost of transportation, even if you spend most of the time on vacation.
And if your trip is longer, you might still qualify for deductions using the “25-percent rule,” which allows you to deduct travel costs as long as fewer than 25% of your trip days are vacation days. Check with your experienced dental CPA for more details.
Hire Your Kids to Work in Your Practice
By hiring your children, you can shift some of your practice’s income to them, reducing your overall tax bill (given they’re in a lower tax bracket). Their wages are also a deductible business expense, lowering your practice’s taxable income.
For kids under 18, there’s an added benefit—they’re usually exempt from Social Security and Medicare taxes if your practice is a sole proprietorship or a partnership owned by parents.
To make this work, pay reasonable wages for real tasks like admin, marketing, or social media, and keep records of hours worked.
Final Thoughts
Tax planning doesn’t have to be complicated, but it does need to be smart and tailored to your specific situation.
If you feel like you’re not making the most of all the tax-saving opportunities available to your practice, we’re here to help. Our team specializes in working with dental practice owners to identify strategies that can lower your tax bill and boost your savings.
If you’re ready to see how much you could save, reach out to us today!
Until next time!
