Financial Mistakes: Tax Gaps, Pt. 2

In this episode of The Dental Boardroom Podcast, host Wes Read continues his series on common financial mistakes dentists make, with a deep dive into tax planning gaps that often lead to paying unnecessary taxes.

Wes explains how many dentists rely on reactive tax filing instead of proactive tax planning, causing them to miss powerful deductions and make poor timing decisions. He breaks down practical, real-world strategies such as the Pass-Through Entity (PTE) tax election; overlooked deductions like kids on payroll, home office, vehicles, meals, and travel; and why depreciation must always align with cash flow.

The episode also highlights the risks of overly aggressive tax strategies, why meeting with your CPA only once a year isn’t enough, and how a CFO-style, proactive approach can significantly accelerate a dentist’s path to financial independence.

Key Topics Covered

• Common tax planning mistakes dentists make
• How the Pass-Through Entity (PTE) tax election works
• Why the timing of tax payments matters
• Low-hanging tax deductions many dentists miss
• Kids vs. spouse on payroll (and when it makes sense)
• Home office, car, meals, and travel deductions
• Risks of aggressive tax strategies like misused R&D credits
• Proper vs. improper use of depreciation (Section 179)
• The difference between reactive CPAs and proactive, CFO-style planning
  

Key Takeaways

• PTE tax election is a major opportunity: Dentists in high-tax states can significantly reduce federal taxes if payments are made correctly and on time.
• Cash timing determines deductions: Tax deductions only apply in the year money actually leaves your account.
• Small deductions compound: When combined, kids on payroll, home office, vehicle use, meals, and travel can create meaningful tax savings.
• Spouse on payroll requires retirement planning: Without a 401(k) or defined benefit plan, it can increase taxes instead of reducing them.
• Depreciation isn’t free money: Misusing Section 179 can create future cash flow problems.
• Avoid crossing the line: Aggressive or poorly justified strategies increase audit risk.
• Tax planning follows cash flow planning: Taxes are a subset of cash flow—not the other way around.
• Proactive advice matters: Dentists benefit most from advisors who specialize in dentistry and meet multiple times per year.
• CFO-style planning accelerates wealth: Integrated tax, cash flow, and financial planning lead to faster and more sustainable financial independence.

Transcript

Wes Read: Welcome everybody. Back to another episode of The Dental Boardroom podcast. I'm carrying on my series on, on, uh, financial mistakes that dentists make. And in our last episode, we talked about. W2 wages or reasonable compensation for an S corp practice owner who has to pay him or herself as a, an employee of their own corporation.

And the tax implications and also the financial implications. Of determining the right amount of W2 compensation for the owner of the practice. I'm gonna carry on this, uh, subject of tax planning gaps, which is sort of the big theme here as one of the key mistakes doctors make is not properly. Closing the tax planning gaps that exist and are causing them to pay unnecessary and extra taxes to the IRS.

So the second item I want to cover is what's called missing PTE, or not taking advantage of the pass through entity election or PTE. Now, I did. A whole episode on this, but I wanna reiterate just how much this is missed by CPAs filing tax returns for dentists these days. Just a reminder of what the PTE is, and this is exceptionally low hanging fruit when it comes to tax deductions.

Uh, the Tax Cut and Jobs Act of 2017. In that act, the Trump administration eliminated people's ability to deduct their state tax payments as a federal tax deduction. So to put some numbers on that, which always helps. Hopefully if your federal tax taxable income. Before paying your state taxes is, let's say 300,000, and you pay $50,000 in taxes to your state.

Your federal taxable income gets reduced from 300,000 down to 250,000. And so if you're in a 32, 35, 30 7% tax bracket, you multiply that rate, whatever your marginal tax rate is, times that reduction from 300 to two 50, and that's how much money. You are saving. And so that could end up easily being 10 to 15, uh thousand for a standard dentist, for a doctor who's really crushing it.

That could end up being a $30,000 tax savings by doing this correctly, especially if that doctor lives in a state that has high income taxes like California and New York. So this one is particularly important for those in high income. STA income tax states is not relevant if you're in a state like Texas or Florida or Washington.

Or Alaska that doesn't have state income tax. And so what you need to do here is you need to find out from your CPA what your projected K one is gonna be for the year, and CPA should be able to do a basic projection, what that's gonna look like. And then you pay 9.3% of that If you're in California or whatever that state tax rate is, you pay that amount on what is the estimated net income in the practice, and you pay that through the practice.

You pay it from the practice and when you make the payment, it needs to be, um, titled or earmarked specifically as a pass through entity tax. Now, each state has a different title or, uh, nomenclature for the pass through entity In California, it's called the AB one 50. Because that is the specific state law that was enacted, allowing this to, uh, to, to happen.

And different states have a different sort of law legal code and so they may have a different name for it, but globally, what we call this is the pass through entity tax, uh, payment. And a lot of times when I've had clients pay this, they feel like. Wes, why am I paying so much in taxes? Why am I paying this PTE in addition to what you're withholding from my W2 paycheck or any quarterly estimated tax payments for income tax payments?

And the reason why or what I say here is that you're gonna pay the same amount of taxes to your state no matter what. It doesn't matter whether you do PTE or not PTE, you're gonna pay the same amount of state taxes. It's whether or not you get a tax deduction federally for making that state tax payments.

That's the difference. So for most of our clients who are in high income tax states, and we use the PTE, which is most clients, what we do is we end up withholding a lot less state tax deduction from their payroll. And it's, in some cases it's, it's very, very low. But then we make up the difference by doing this.

PTE payment, which most states allow you to log in online to the state tax agency and make the payment through there. You could do a check, but I recommend doing it electronic. And when you do that, you designate that payment as a PTE tax payment, and now instead of it coming outta your W2 paycheck, or instead of writing a quarterly estimated normal income tax payment to your state, instead you're writing this PTE payment and sending it to the tax agency.

And the only difference. Is that now you get a federal tax deduction for making that PTE, and it's a simple checkbox. That's all it is. This isn't a complicated strategy. It doesn't take time. It simply. Takes actually doing it. It's that easy. So make sure you have your PTE payment made. You can see this on your corporate tax return.

Now, a reminder that many of you are in a state that allows you to incorporate, or I should say establish your business as an LLC, but federally there is no such thing as an LLC tax return, and therefore you have to elect to file your LLC as a corporation, which generally speaking is the right approach as opposed to filing it as a sole proprietor.

So you file it. If your LLC as a corporation or if you're in states like California, where you have to organize yourself from the ground up at the state level as a professional corporation anyways, because LLCs are not allowed for certain services businesses, then you are, um, either way you're filing this 1120 s tax return.

But if you see on that tax return, there's a specific place now and has been for eight years or so. That shows how much tax or PTE tax was made, and then that flows through on the 10 40 as a state tax payment. Just the benefit is now you're taxed lower federally for having made that payment. So that's the PTE.

You can chat GPT it if you wanna learn a little bit more. But the main thing there is the takeaway. The action item is to confirm with your CPA. If you're in a state that has state income tax, particularly a state that has higher income tax, which I would say over, let's say 5%, then I would make sure to talk with your CPA to double check that they are recognizing your PTE payment.

Here's the caveat. States have different rules around when you have to pay that. In California, you have to pay a certain amount by, I believe it's June 15th. You've gotta make that payment by that day. And if you don't done, you can't make up for it. You can't write a check after the end of the year. You can't do it.

So you gotta make sure you hit the payment due dates. I think California's a little bit more rigid than other states. Other states probably would allow you to play pay near the end of the year or perhaps even after the year is over. But in California, no. It's gotta be paid in a certain way. And the other thing I'll say about this, and this is crucial, is that you get the tax deduction in the year that the cash actually leaves your account for that PTE payment.

So let me give you an example. In California, you have to make at least a thousand dollars payment by that June date. And if you don't, then you can't elect it. Now they've been talking about changing that rule, but let's say, let's say you pay a thousand dollars to just sort of meet the minimum there, and then near the end of the year when you can better calculate what your profit is going to be, uh, then you can make the remainder of that.

But let's say you wait till the year is up and your overall PTE payment. Is $30,000. You paid $1,000 back in June. The year is now over. We are in January, and as you know, estimated payments can be made all the way up through January 15th, and you make that final payment of $29,000 on let's say, January 10th.

Well, guess what? You're only gonna get a tax deduction of a thousand dollars. On that year's tax return. Why? Because you only had a thousand dollars leave your bank account in the year of the tax return. The other $29,000 is now gonna be deducted in the following year because that's when the cash left year account.

So we make sure all of our clients are making their PTE tax payments fully as we can project them by December 31st in the year of, and that way we are accelerating. The benefit of that PTE tax deduction into the year of, of, of now, of today and the, the sooner you can get a tax deduction, all other things being equal, the better.

Alright, let's go onto the next one. Missing low hanging tax deductions. There's a lot of tax deductions. I call this casting the wide net. Standpoint, casting the white net view of this is getting a lot of little deductions that aggregate up to being a big deduction. A lot of little deductions that aggregate up to being a big deduction.

And because a lot of these are small, a lot of people overlook them, or CPAs will say, don't do it. There's a lot of very conservative CPAs out there, and I get it. Their name goes on the tax return as well. They are subject to exposure from the IRS if they allow things that are egregious or tax evasion to get through and they do so and they allow it knowingly, that could put their license on the line just as you dentists, um, have, uh, license requirements to, um, practice good dentistry.

We CPAs have the same thing, and so the tax CPA's name goes on that return. A lot of times it makes CPAs extremely cautious and I think overly cautious. So my, my mental, um, sort of catchphrase on this is I will tow the line. I will not cross the line. So the, the, the strategy, the nuance. The, the, the technique around this is what does it mean to tow the line?

Because if you tow the line but don't cross it, you're most likely not gonna see an audit. And even if you were in an audit, it's not gonna be that egregious because we have some rationality for the deductions that we took. They may have to offset some of those or disqualify a few of 'em, and you may owe a little bit of taxes and, and a little bit of penalty on it.

But generally speaking, the, um, the return on taking these aggregated small deductions. Amounts to quite a bit, and my risk profile is such that I'm okay. I'm okay to allow some audit risk. As long as we can point to some justification for these deductions. I'm not okay with tax evasions. So if you said, Hey, Wes, can I just like deposit?

A lot of my checks every month into my personal account, so it never shows up in my business account. Well, that's a problem. That's tax evasion. I personally think that the r and d tax credit is certainly flirting with the line of tax evasion. If it is not tax evasion. I think it is a very abused tax strategy, and in the event of an IR.

As audit, it's like 90% sure this thing is gonna get overturned and then you have to pay back the taxes and penalty. And the person who did the r and d research that came up with the report and had the tax return amended, that person's long gone and is not gonna assume liability in most cases. So I just think the RD tax, uh, credit, which I did an episode on this where I invited a partner from a large.

Uh, uh, nationally known CPA firm. Who all this partner does is help businesses implement it and make sure it's done right. He looks at the way that most dentists who are electing the RD tax credit, he says, there's no way. There's no way that's gonna fly because is it really doing research and development that is potentially changing.

In a fundamental way, the way the business operates making it operate different than most other dental practices or innovating something new in the industry, most of the time you're following tried and true processes within a dental practice. Even if you have a cadcam and you have your own lab, even those are gonna be difficult to sort of credit as an r and d tax credit.

There are some cases. There are some cases where we have innovative dentists really trying to break through on a new process or a new technique or a new material, and that can absolutely make sense, but be careful with that one. And what I'm talking about with missing low hanging tax deduction that I get fairly aggressive with are the following.

And here's to name a few. Putting your kids on payroll, which I typically do around six years old. And if you pay the kid your child, the amount of the standard deduction, which this year is right around 16,000, I think it's 16,100 perhaps. In fact, I got that right here. Lemme just look that up. It is. EH, 16,100.

That's it. 2026. If you pay your child $16,100 and not a dollar more, then they're gonna owe $0 in federal taxes. Depending on your state, they may owe some state tax and they'll owe some FICA tax, but if you add up their state and FICA tax, generally speaking, it's substantially less than. What is your as a business owner?

Marginal tax rate. So if your marginal tax rate fed in state is, let's say 40%, and you pay three kids $16,000 each, let's, I'm gonna round that up to $50,000 total. Yeah, and let's say the combined FICA and state tax rate you're gonna pay on that $50,000 to your kids ends up being, let's say $5,000. So you just paid $5,000 in taxes in order to get a $50,000 tax deduction at your 40% tax bracket, which is $20,000.

So I don't mind you paying $5,000 in taxes for your kids' payroll in order to get a $20,000 federal tax deduction. Federal state tax deduction. So all that is, it's arbitraging or taking advantage of the difference between your tax rate as a business owner who is in a higher tax bracket, particularly if you're running a really thriving practice and your kid's tax bracket.

Now if you're in a dental practice that isn't spinning off a whole lot of income, maybe it's a newer practice, maybe the market is down in your area for whatever reason, and you're in a lower tax bracket, it closes that arbitrage, it closes that gap between your tax bracket and your kids' tax bracket and makes that tax deduction less valuable.

So what I would, what I would do is, I'd, I'd, I'd say, is your marginal tax bracket. And your CPA will know exactly what that means is your marginal tax bracket north of somewhere around 30 to 35% federal and state combined. If it is, then it's probably a really good idea to put your kids on payroll. And I have been doing this since 2009 and had thousands of kids on payroll.

I haven't had a single audit issue over, over this. Uh, but the truth is I will always say you should give your your child a job profile and you can just type that up. We got some examples you can use and, um, and have that documented, which may be modeling pictures on the wall. May be them coming into the office once a month to take out trash, vacuum, just do marginal stuff like that.

Anything you can. Come up with to have your kids do the better. And truth is, if you actually have 'em do that work as 8, 9, 10, 11, 12-year-old kids, they actually start to learn a little bit about your practice and some work ethic there. And I think that's a good thing. The truth is, is the IRS isn't necessarily going to go interview your child to ask what they're doing.

So having it documented as evidence to point to is the primary thing there. Alright, the next one is spouse on payroll. Now, I would never put your spouse on payroll unless you have a 401k plan. The reason why is you and your spouse are most likely filing a joint return. In most cases, filing a joint return is better than filing a married, filing separate return.

And so if your spouse is on payroll, and yes, you're gonna get a deduction for paying your spouse, but guess what? Now your spouse has to recognize that income. So if you paid your spouse, theoretically, a hundred thousand dollars. Okay? Your K one, your taxable income from your corporation is gonna be a hundred thousand dollars less, but now your spouse has to recognize a hundred thousand dollars of taxable income on their W2, and they're paying FICA taxes on it.

So that's actually a bad idea. You're actually paying more in taxes by throwing your spouse on payroll, uh, because they're filing the same tax return as you, as opposed to a child who it would be filing a separate tax return, or if it's under 16,100 doesn't even need to file. A federal tax return because you only have to file a federal return if you actually owe taxes.

So that's a good scenario there. Uh, that's why I don't put spouse on payroll generally, unless the following applies. You now have enough cash flow to justify funding fully a 401k plan, and if you're really cranking it, a cash balance defined benefit plan, once you do that. And you put your spouse on payroll.

Now yes, you're gonna pay some additional in, uh, FICA taxes by putting them on W2. However, let's say your spouse can fund 20 3020, what is it this year? 2026? It's January, everybody, forgive me. I'm learning what the new updated amounts are. 24,500 if they're under 50, and if they're older than 50, it's gonna be an additional 8,000.

And if you're between age 60 and 63, it's another. 3,250 on top of that, which, that's a new tier in the, um, employee contribution, uh, limit to 401k. So let's say your spouse is older than 50, then that's gonna be $32,500, and then they get some employer contribution, let's say, that ends up being. I dunno, $5,000, you're pretty much getting close to $40,000 there.

Especially if you have a defined benefit plan. You're probably gonna exceed that, and theoretically you could end up paying your spouse a lot more if you paid him a hundred thousand. Your spouse is gonna end up being able to contribute a lot more than just that amount. We typically pay the spouse just enough to maximize their employee portion called the elective deferrals, which is 24,500 total employee contribution into a 401k.

And, uh, if you do that, well, now you're getting around a 30 to $40,000 income tax bracket at your federal and state marginal rates. And let's say that that is 40%, well, 40% of $40,000 is $16,000. 40% of $30,000 is $12,000. You may end up paying a couple thousand, two to 3000 in FICA taxes for your spouse.

That's the only difference. But like putting kids on the payroll, I don't mind you paying an extra $3,000 in taxes if a, you get $12,000 now of an income tax deduction. Netting $9,000 overall tax reduction, and now you have another 30 to $40,000 in a tax deferred retirement plan that's gonna grow at somewhere around seven to to 9%, most likely in a diversified index allocated, uh, fund, or four oh K plan.

And that's gonna grow compound tax deferred for many, many years. And yes, down the road when you pull it out, you start paying taxes, but it's very likely you may be in a lower tax rate. Not guaranteed, but it's likely. And the bigger benefit though, is that you don't have to pay taxes on the interest. The dividends or the capital gains within that portfolio for a long time.

And instead, you're able to reinvest a hundred percent of those three things into buying more. And that's what creates this beautiful compounding element to your growth in your portfolio. And that's why tax deferred is fantastic. Now, there are some cases where I'll tell a doctor to do the Roth portion of the 401k.

I love the Roth portion of the 401k. The disadvantage with the Roth four oh k is that, is that 24,500, or if you're older than 50, that 32,500, or if you're between 60 and 63, that 25,750, depending on your age, but you take your age, whatever you're at now, and just are you under 50? Great. It's 24,500. Are you older than 50, but not 60 to 63.

Great. It's 32,500. Are you between the age of 60 and 63? Great. It's that F 30, what did I say? 35,750. But that amount, that tier, that is the employee contribution of you or your spouse, you can make that a Roth contribution, which is after tax, so you don't get that tax deduction. So you're not saving that roughly 10, you know, 10 to $15,000 for the year.

But that's not only gonna. Compound over time tax free. When you pull it out, it's not taxable either. Uh, now if you're gonna be in a lower tax bracket when you retire, probably better not to do a Roth. But here's why I like the Roth, and this is why most of our clients will fund a Roth IRA every year, typically through a backdoor contribution, which we do this for virtually all of our clients.

The benefit of that is that a, we don't know what's gonna happen with general tax rates in 10, 15, 20, 30 years. We know our national debt is completely outta control. It's roaming, it's approaching close to 40 trillion right now, and the one big beautiful bill is projected to add probably another four or 5 trillion to this in the next three or four years.

And so this is just going up at, at a faster pace. There's, there's almost this compounding effect taking place in our national debt where it started off small and. And sort of lightly grew over time. Well, now that curve is steepening tremendously, and it's a very precarious thing. It's, it's a, we're heading toward a debt cliff that this country has to figure out.

Some political party has to be the party of self-restraint when it comes to spending. And right now nobody seems to want to step up to do that, Democrats or Republicans. So this is, this is a nonpartisan problem we have in the country, is that issue. And as the national debt rises, there's, we're, we're, we're gonna have to pay for it somehow.

And it may be inflation that sort of reduces that balance. In real terms, it may be a tax increase. And we are historically in one of the lowest tax periods ever in our country. And so it's very possible that 20 years from now, in order to sustain ourselves as an economic entity, as a country, we're gonna have to raise tax rates.

And I'm not saying yes or no good or bad, I'm just saying. Logically and mechanically, mathematically it probably is gonna have to happen in order for us to climb out of this space. Uh, I don't know how, because a politician who says, Hey, everybody, I'm gonna increase tax rates, probably is not gonna win the vote is 'cause most people don't fully understand the, uh, detrimental economics of.

Excessive national debt. Countries are brought down because of the deflation of their dollar, which in many cases is attributed to an overwhelming national debt. This is why gold is just on an absolute tear right now, is because people are forecasting potential rises in inflation devaluation of the dollar.

So that's a little bit of an economics lesson there, but my main point in all of that economics lesson is that tax rates in the future may be higher than they are now. And if you have some portion of your savings going into a tax free account, at a minimum, your Roth IRA every year of, if you're under age 50, your Roth IRA is gonna be 7,500.

If you're older than 50 this year, 2026, it's gonna be 8,600. And if you have a spouse doing the same thing, doubling that, um. Stacking those nickels, as I say over the many years, will give you this really, really nice flush tax-free balance. I would love for you to retire with somewhere between 500,000 and a million of tax-free bucketed money in a Roth IRA account because then, uh, when you have to pull money.

Out of that, let's say your social security, uh, or any maybe part-time income or, or your other sources of income outside of your investments isn't enough, and you have to pull from your investments to supplement your living and retirement. We can pull just enough from the Roth IRA balance that the tax free balance.

To stay under the higher tax brackets in retirement, and you have these levers then to better manage your tax liability in retirement. That's one of the reasons why I love, um, Roth accounts. I call that tax diversification across your investment accounts. And in my sort of ideal scenario, you're probably gonna have an account that has some taxable money.

You're gonna have an account that has some tax deferred money and you're gonna have an account that has some tax free money. And then you can use those very effectively to manage your taxes later on. So I, if you really have the, the guts to do it, I'd love to see more Roth ira, uh, contributions to the 401k.

But again, as with all tax planning, like I said in my last episode, it has to be seen in the context of cashflow planning. Tax planning is simply a subset of cashflow planning, not the other way around. And so can you pay an extra 15 to $20,000 for two spouses to max their elected deferrals in a Roth bucket?

Can you afford that? Well, that's what cashflow planning is gonna do. It's gonna look at the entire ecosystem from your labor labs, supplies, facility marketing overhead to your taxes, to your debt, to funding your retirement plan, to your personal living expenses today. It's gonna see all that in context to each other, and then you're gonna be able to make the right decision about how to allocate surplus dollars, and you can decide if funding a Roth.

Uh, 401k is gonna be a good use of that surplus dollar because of the additional taxes you're gonna pay into that Roth account. Alright, if you didn't follow that, I think it's a really important, I would rewind, try to listen to it once or twice if you could understand that you're really breaking into an educational mindset where you are becoming versed in these financial topics, which I think to be financial really financially independent, financially free, there is a baseline of finance knowledge.

That a person as a human, as a living person with bank accounts and credit card accounts and debt and assets and goals and all that need to understand some of this language to have an efficient pathway toward financial independence. Alright, let's go on home office. The home office deduction is something we love and we have systematized it into our tax return.

So every year we send out through our practice management software called Carbon with a K. We send that out to our clients and they will fill out a form where they put in the cost of their home office. They'll put in the the square, square footage of it, square footage of the house, even square footage of hallways and closets that you can reduce the denominator buy to get more of a percentage going toward the home office and then allocating or uh.

Adding, what are the costs for utilities? What's the cost for rent? If you're renting, what are your costs for home maintenance, for cleaning, for all of that stuff? Uh, phone bill, internet, all that stuff. You can now prorate a portion of that, which normally is not tax deductible. Now you can get a tax deduction on it.

And I typically see that giving doctors somewhere around. A thousand bucks all the way up to maybe six or $7,000 as a tax deduction per year. Not huge, but not insignificant either. It could fund your trip to Hawaii, perhaps, or you throw that $6,000 of savings into a retirement plan compounded at seven to 8% over 30 years, that's gonna turn into a hundred thousand dollars or more.

Think every, if you're getting 7%, it's gonna double every 10 years. So it'd go from 7,000 to 14,000. In the first decade, then they go from 14,000 to 28,000 in the second decade, and then it would go to 56,000 in the, in the third decade. So after 30 years, that 7,000 is now 56,000. And now here's where it gets crazy.

If you're young enough and you have 40 years, that 40th year now goes from 58,000 up to 116,000. This is why 90% of Warren Buffet's wealth. Uh, was accumulated after he turned age 60. It was because of that steepening, dramatic steepening of the curve. Once time has sort of passed, and if you got a 10%, it's gonna double.

10% rate of return, it's gonna double every seven years. And so, uh, depending on your aggressiveness in your investment strategy, will determine how fast that doubles over time. Okay, so that's the home office deduction. I love it. A lot of CPAs don't like it. I like it. Uh, in terms of what the, I expects they expect that home office to be used as a, uh, used regularly.

And exclusively. So the iris has these terms around this stuff like the compensation, your W2. Their term is reasonable compensation. That's it. Reasonable compensation. With the home office, they say it has to be used regularly and exclusively. So what I would do is I would take a picture of the office that clearly has no weights, no toys, no exercise equipment.

No, no, no entertainment equipment, nothing like that. You take a picture of you in your scrub, sitting at a desk. And maybe have some dental magazines right there, some dental books right there as well. And then you have that for your records. 'cause most audits. Are not field audits, they're remote and you have to send in evidence to back certain deductions so you have that.

Um, and then if you fill out our form or have your CPA give your CPA the costs, uh, then it's documented on file and you should be pretty safe. So as with so many things around taxes, a little bit of effort to make sure that you have something to point to as documentation, uh, is gonna support you in the event of an audit.

So that's the home office deduction. Now let's go into cars. This question is often asked by, by, by doctors. What can I deduct? Very standard, safe deduction is that you can deduct one car in your corporation. It's your car, it's a business car. Do you have to literally buy it as a business to where the title of the car has your business name?

Not necessarily. And if you wanna do it right, you could buy it personally, and then you can do a, um, what is it called? A bill, a a, a deed transfer where you're transferring it into your corporation and you have that documented. This is something I've never seen. The IRS actually come and ask for documentation on this, but I should say as a CPA, what the IRS.

Would expect for this to be legitimate in their eyes per the code. The nice thing about the car is it allows, nor normally your commute from your home office to your, your field office. So what I'll call your administrative office, which is your home office and your, uh, your business office, which is your practice.

Normally, uh, commute is not tax deductible. However, if you're going from one office to another. One business office to another business office, suddenly it becomes tax deductible, and so now you can deduct your commute. And so let's say your car has in a given year 10,000 miles and you add up your commute or any other legitimate business.

Travel and it's, let's say 50% of that, well, then you get to deduct 50% of your gas, 50% of your maintenance, 50% of your cleaning, 50% of repairs, 50% of all of that, your insurance, everything gets, uh, deducted to that pro-rata ratio of how much you use it for the business compared to how much you use it personally.

And I suspect when we send out the form to our doctors to give us sort of that ratio that they're probably a little aggressive. I I see 90%, 95% come in regularly. You know what, it's, it's gonna be on you. To validate that in the event of an iris audit, which is very unlikely, but if, if you do get audit, what the IRS wants to see is that you actually have a log book.

Tracking your odometer, your odometer of what was used for business and what wasn't. It's actually a little bit pain painstaking of a process to actually totally do that. Right. But again, this is like, what's your risk tolerance with so many things in life, what's your risk tolerance in the stock market?

What's your risk tolerance for buying a motorcycle? What's your risk tolerance for, I dunno, getting on a plane? There's a risk tolerance to everything, and there's a risk tolerance when it comes to how aggressive we are with our taxes. I'm trying to encourage you to be somewhat risk tolerant. Because taxes are your biggest personal friction to financial independence and we've got to deal with that.

But it's, it's also gotta be something that you're comfortable with. 'cause at the end of the day in an audit, my name's on the tax return, but I'm gonna say, Hey, the client gave me this documentation, or they, they validated. Uh, this, that they, uh, did drive the car 80% of the time for business, that their kids were actually doing work, that their spouse was actually doing something in a practice that they did use their home office regularly.

School that's on, that's on you. And, um, like I said, the chance of actual exposures pretty limited. I mean, I've been doing this now for, what, 17 years, and I've seen almost no issues with any of these. So that's up, that's up to you. That's up to you. Where I do see an issue. Is when you don't pay yourself a W2 As an S corp owner, that is the biggest reason why, uh, dentists get audited is unreasonably low compensation.

Because going back to my other episode, the RS wants their FICA tax and you only pay fica, which is 15.3% on the W2, not on distributions. That's a big important concept there. So that's your car. Let's go into meals Now, meals are. Historically, it's gone back and forth what the tax code says on these mills.

And the a s overall is very restrictive on you being able to deduct mills. A mill can be deductible up to 50%. There were periods of time where it was a hundred percent, but up to 50% if it is for a legitimate. Business use. So if you bring in meals for a staff meeting, that one's a hundred percent tax deductible.

Deductible. If it's, if it's marginal to the overall sort of event that the food is there to support an overall event, then that one is deductible. But if you take like a, um, if you're a specialist and you take out a GP to dinner, or you take out your CPA, Hey Wes, let's go out to go out to dinner and you pay for it.

Now, if you're a client, I'm gonna pay for that, by the way. But if you were to pay for that, that's a legitimate 50% deduction. Right there. We're going out to dinner and the IRS says there's absolutely a personal element to that. So we're only gonna allow a 50% tax deduction. Theoretically, if you were audited, they'd want to see a receipt or somewhere that you documented this, what the, what the meeting was for, how long it took, that kind of thing.

And it's, it's onus for sure. And uh, but again, it's just something I just haven't seen it be much of a flag, uh, for the IRS. And the last one I'll mention here is travel. Uh, travel is a, uh. Is an area that you can enter into tax evasion or you can be tax avoidant. Tax avoidant is okay because you're using the code legitimately to your benefit Tax evasion is where you're simply, um, not, not following the tax code.

Blatantly and knowingly not following the tax code and travel can. A lot of these can sort of venture in both those spaces, but travel especially, and I've had some clients be extremely aggressive on this, a two week trip to Europe trying to run a hundred percent through as business deductions. That's tough.

That one's tough to justify. Now, if you're in Europe, because I don't know, you're with Coist or something and they're doing a trip to France and it's an international convention. I have no idea. I'm making this up, and you go there and it's a week long conference and you stay an extra couple days for the weekend.

Yeah, you can probably deduct virtually all of the costs there. But if you go to Europe. And you watch some, uh, webinars online while you're in your Airbnb someplace, and your, uh, 98% of your trip is for, for pleasure. That one to me is probably crossing the line. And so I wouldn't recommend doing that, and my name is on that tax return.

And I'm exposed therefore too. And so if you did that, I'm gonna have you really document out your itinerary, what you did and what was business. Because in that area, I've got to protect myself. But if you can justify that, or if you're domestically taking a trip to see your mom and while you're at your mom's, you are also meeting up with some dentists to talk about business or you're gonna a conference, then it's a little more grain.

You can be somewhat aggressive on that area. And what I do at practice CFO, if it's over $10,000, I have you fill out. At the end of the year, we send our, through our practice management software list of some questions around, around the home office, around, um, around meals and around travel. One of them around travel is.

If it's above 10,000, I, I like to have you document what you did and the dates and the business purpose to protect you and to protect us as well. If it's under 10,000, I usually call that what we CPA say is di minimis and I don't really worry about it. We just run it through and, uh, I don't think it'll raise a flag and you go ahead and take the tax deduction on that.

Now there are other small deductions. One that's very aggressive is called the Augusta Rule, where you rent your house to the practice. And there are people that, uh, promote that. I typically don't promote that one 'cause that one's pretty aggressive. Are you really having your staff come to your office, let's say once a month for a staff meeting, if so, and you're serving them up and it's a half day or full day event?

Yeah, I actually would say, yeah, you absolutely should be charging rent to. Uh, use your house. So the corporation pays you personally, and, uh, if it's under, uh, a certain, a reasonable amount, you actually don't have to recognize the taxes, uh, on that personally. So that's, that's one of the few areas where you can get the business tax deduction without having to recognize the personal income, even though it's essentially a transaction between yourself and your business.

That's rare. But generally speaking, for people who don't do businesses at their house, I would say. Um, to not do that one. Um, and also if I wouldn't let the tax tail wag the dog and say, oh, I'm gonna do a meeting, uh, a month at my house with my full team in order to get this tax deduction. Okay, if you did that for $2,000 a month.

12 months, $24,000, let's say you end up saving eight to $12,000 on that. What are you paying by having your team out of production for 12 business days out of the year? Uh, or even if it's on a nonclinical day, you're still paying them to be there and that's gonna end up being more than $12,000, guarantee you.

And so I, uh, I just, I would be mindful of that one. Alright. And there's other low hanging fruit. I'm gonna really emphasize those ones as a few of them. Let's move on to the next item. The next item is misuse of depreciation. Now, I've talked a lot about this one. I just want to pin this one again for people to understand that depreciation is a tool, uh, uh, around timing.

When you get a tax deduction, it is not a new, a free tax deduction that just pulls out of thin air. All it is, all it's doing is it's determining when you get to deduct that expense. As an example, if you buy a, uh, 10, uh, that's aggressive. Let's say you buy five new really nice dental chairs and each of them are $10,000 each, that's $50,000.

I don't know my cost on these things exactly. So hopefully that's a reasonable number. But the total cost of the chairs of $50,000, the normal standard depreciation that will occur on that is, uh, it's deducted over five years. Not evenly, but it's deducted over five years is my main point. So five years to get the full tax benefit of paying for those chairs.

If you elect 1 79 deduction, that's 1 79 deduction. You'll hear this from people. The section 1 79 deduction, which is the section of the tax code section 1 79, that allows you to front load all five years, uh, into the first year if you elect it, or what's called bonus depreciation, which is another way to front load some of that depreciation.

If you do that, great, now you get a hundred percent deduction on that 50,000. And if your marginal tax rate is, let's say 40%, well you just saved $20,000 in that year. So your net out of pocket for buying those chairs is 50,000, less than 20,000, actual $30,000 that that's your true out of pocket cost once you factor in the tax deduction.

But again, I've said this so many times, sorry if I'm repeating it, but I just see this so often in dental is at the end of the year. The, uh, supplier comes to you and says, you should buy this. It'll help you save your taxes. So you buy it, you get it in place by December 31st, you give it to your CPA, you finance it, so you don't even come out of pocket with money.

And now you get to save $20,000 on those $50,000 of chairs. And your CPA looks like a hero because you get a refund, or you don't pay as much the next year, though now you don't get the $50,000 deduction, you don't get any deduction related to it other than a little bit of interest. On making the loan payment.

And so now you have a lot of money going out the door to make the payment and you get virtually no or very limited tax deduction and now all that benefit you got in the first year, everything reverses in that second year. So the only time I say to take the 1 79 deduction in the year that you bought it is if you bought it in cash time.

The deduction with the cash outflow. If you got a loan and you're gonna pay that loan over five years, you should let the standard deduction play itself out. Otherwise, you're deceiving yourself with a UN, with a deceptively low tax bill. Then it sets the precedent on how much you pay in taxes in the next year, and you end up not contributing enough in taxes.

And that next year, the supplier comes and says, now you need to buy this CAD cam for a hundred thousand dollars in order to get outta this tax trap that you're in, and you do it and you finance it. And then the third year ends up. And it saves you the second year and the third year, you go from a problem that is three to four times the problem of the year before that.

So depreciation is a beautiful thing when used properly, but it needs to be managed in the overall cash flows, as I keep saying, tax planning. Depreciation planning should be a function of overall cash flow planning and cash flow planning means that you're taking your historical cash flows in your p and l and your balance sheet, and you are projecting them out.

Into the future and using reasonable assumptions in those projections to determine your deficit or your surplus, and where you can cut costs and how you can grow your cash flow and whether or not. You should accelerate depreciation or not. But that's where the complication comes in and that's where the CFO model becomes extremely valuable.

Uh, as you know, I pitched this and I'm pretty open about it, whether you use practice CFO or there's a couple others out there that do an integrated financial planning and tax approach for dental practice owners specifically, I call that the CFO model, which is much more proactive, more meetings with.

Your your CFO advisor and therefore more forecasting and cash flow planning that allows you to align all of these strategies in the most optimal way and the outcome is significant. This is why when a doctor comes and says, oh man, you're a lot more than my bookkeeper, and I say, that's 'cause I'm not a bookkeeper.

This is, that's not apples to apples comparison. There's bookkeeper slash basic accounting, even general CPA work, and then there is. F. Financial forecasting, financial planning, that is CFO work, chief Financial Officer work. That's where the money's made. That's where the money's made, and that's why a good CFO platform should be much more viewed as something where you're specifically getting a return on that investment rather than paying a phone bill, which is largely just a commodity expense that you have to pay.

And there's not a whole lot of value across the different vendors there. For example, VoIP systems. Not a whole lot of values across the vendors there. Um, now that they're more to that story, but you get my point. Uh, I, and I feel the same way with marketing and I feel the same way with, um, with operations and practice management consulting, these things.

If you can manage. To get the right people and oversee them well through a good accountability and meeting cadence with them and ways to measure the product of their service or the outcome of their service, then I view that very much as an investment with a return on investment, ROIA, return on investment, and a good business owners are able to learn to distinguish between what is a commodity cost, that's all about the cost and what is an investment that is.

Partially about the cost, but partially about the the effectiveness of that investment. And typically the latter. IE, these investments require you to be involved in the delivery of that thing. You're paying for a phone bill. You don't need to be involved, a practice management consultant or a CFO advisor or a marketing consultant.

You absolutely need to be involved. In that process because if you don't help implement support, it telegraph it to your team, stand behind it, give it authority, understand it, know how to measure it, then it's just money in the wind. And a good business owner learns how to make that distinction and to create accountability with those investments into professional service providers that help them grow their business.

Alright, let's go on to the last one here, not meeting with your CPA during the year. So the last one, I'm gonna say I'm 45 minutes in. Generally I wanna keep these less than that, but last thing I'll say about this is your CCPA. There are, as with dentists, as with anything, there is a spectrum of quality in your CPA.

And here's my 2 cents on this being a CPA and trying to be as objective as I can here. Um, specialty knowledge in our fields matters now. In the dental space, special specialties are actually very formalized through designations. Like not just DDS or DMD, but also oral surgeons have a designation. Um, uh, different specialists have different designations, and it's extra schooling, it's extra CE requirements.

Well, in the CPA world, you don't really have that. You just have the CPA, uh, that doesn't mean the CPAs don't specialize. Some of them do. A lot of them are generalists, but in this area, I would say specialization with the CPA, who has a focus, maybe not exclusively, but has a decent share of their client pool, is dentists, then the more benefit you're gonna get out of that specialized knowledge.

Now, with specialized knowledge typically comes a higher cost practice. CFO is gonna be higher cost than your. General, uh, accountant down the street, working outta their house part-time, you're gonna get a very different level of involvement around maximizing tax deductions and properly and efficiently.

Um. Planning around the use of your cash flows in your practice is very different service, but at a minimum, most dentists out there don't have a CP who specializes in dentistry. A number of 'em do, but I would say at least 50 to 60% of them don't. I would say the first simple. Easiest thing you can do is find somebody who really, really knows dentists.

Now, if you have a CPA who's a generalist, but they really take the time to meet with you throughout the year a few times, they really take the time to forecast for you. They really take the time to understand your uh, situation. As a dental practice owner, you're probably okay, but I just doubt that's happening if you're with a general taxi.

PA truth is there's a lot of dental CPAs out there who are not very involved. Yeah, they label themselves as dental, and it's a bit of a marketing thing, but they really don't develop systems, metrics, measuring tools. And processes that elevate or sort of surface, what are the dental specific strategies around cashflow, financial planning, and tax deductions that a dentist can uniquely take advantage of?

Uh, for example, a really good. Dental, CPA is probably gonna meet with you at least twice, if not three to four times during the year. They're gonna look at the type of equipment you're buying. They're, they'll be able to talk to you about the return on investment of doing a build out of a new op and when to do that or what, uh, what types of compensation programs there are for hygienists.

They're just gonna understand these things a lot better that are nuanced to your space. And so getting a specialist in the, uh. In the dental world, I think is the first way that you can increase your return on that investment is just finding somebody who's within a dental space. So you can type dental CPA from if you would like.

Now, the tier above that, and this is my pitch for practice, CFO, of course, I do this podcast not outta the goodness of my heart, although I hope it is helping a lot of people. I really do it because I, I wanna drive people to practice CFO. And I, there's no reason to try to hide that. I wanna drive you to practice CFO to consider us because we systematize everything I do in all these podcasts, we systematize so much of this so that the burden is shared.

And in fact, in some cases we, we will bear. Virtually a hundred percent of the burden, and in some cases we're more coaches and educational resources, and you'll see other burden, but it's a mix across the spectrum of things that we do as financial planners. But my main point here is that practice CFO isn't just a dental CPA firm.

It's not just CPA firm. It's not just a dental CPA firm. It's a dental wealth management firm, which means. We are driving financial wealth for you, driving financial independence for you, driving life, planning for you, all of that. That is the tip of our spear that drives everything we do. Then we can back into the CPA.

S dental specified services that we do, which give us us the financial x-rays to then give good sound financial advice, clinically speaking in the practice and also outside of the practice. And fusing those two, the personal and the business in a unique way that is dental focused, that creates this overall game plan that dramatically.

Accelerates financial independence. It is remarkable to see how fast or how much our client's net worth is going up every year when you get an ecosystem that is really operating, uh, smoothly and in an integrated way. So meet with your CPA, maybe change your CPA. So they're dental specific. If you want a financial planning focused dental, CPA firm aware, the CPA arm is actually just the back end and the financial planning is the front end.

That's what, that's what it is here. I started practice CFO with financial planning only at first, in the beginning, and I tacked on the CPA work later in order to be able to be a better financial advisor for our clients than I say, I say do it, but regardless, you gotta meet at least twice a year with your CPA.

It can be in person. Preferred virtual is fine, but you should be able to see each other in the face, talk to each other and go through an agenda. And if your CPA comes and sits down and says, alright doc, what do you wanna talk about? That's an indicator that that CPA is not engaged. And you need to find somebody who is, if the CPA comes to you or the advisor comes to you and sits down and says, okay, I've got an agenda, here it is.

We're gonna cover your tax plan. We're gonna do a cashflow forecast. We're gonna design what your W2 should be. We're gonna talk about getting your kids on payroll, whether or not get your spouse on payroll, if it's the right time to set up a 401k. We're gonna look at your home office, car mills, travel, et cetera, and we're gonna talk about what goals you have in your practice in terms of expansion and decisions that you're making.

What else do you have to add to the agenda? Boom, that's an entirely different meeting than your CPA sitting out saying, what would you like to talk about? Or just pulling out the financials and going top to bottom of the financial. That's fine, but that's not gonna get you where you need to go. If you want to climb out of this bind of taxes and inefficient cash flow to support your practice and your life, you need an integrated approach and somebody who is highly engaged and proactive.

Alright, everybody, those are the tax planning gaps, the mistakes that I see dentists make. To summarize, not not. Targeting the right W2 compensation, missing their pass through entity tax deduction, missing the low hanging tax deduction, like kids, spouse on payroll, home office, cars, mills, travel misusing or electing improper depreciation on their tax return.

And lastly, not having an engaged or engaging their CPA or or financial advisor, particularly somebody who is dental specific and. Particularly somebody who really understands the finance and financial planning side of it and can integrate it into your personal life as well. Alright, everybody, until next time, have a great one.