Dental Financial Planning: Turning Chaos into Financial Freedom - Part 7

117: Dental Financial Planning: Turning Chaos into Financial Freedom – Part 7

In this episode of The Dental Boardroom Podcast, host Wes Read, CPA, CFP®, continues the financial planning series with a deep dive into tax strategy through payroll and year-end planning. Wes explains why payroll is the single most important lever for tax efficiency in dental practices, and how dentists can avoid underpayment penalties, maximize retirement contributions, and streamline cash flow by handling payroll the right way.

Rather than relying on clunky quarterly estimated payments, Wes shows how W-2 withholding can cover nearly all tax liabilities, eliminate late payment penalties, and simplify the process for both dentist and CPA. He also explores practical deductions—home office, kids and spouse on payroll, vehicle deductions, depreciation rules—and why timing income and expenses before December 31st is critical.

Along the way, Wes cautions against aggressive or “too good to be true” tax shelters that promise big savings but often lead to IRS problems, emphasizing that smart tax planning is about discipline, structure, and integration. He shares why Practice CFO brought payroll in-house to better align tax, retirement, and financial reporting, creating a seamless system that prevents costly mistakes.

By the end, listeners will have a clear roadmap for forecasting taxes, applying proven strategies, and executing a payment plan that keeps more money in their pockets while staying compliant.

Key Points

The Role of Payroll in Tax Planning

• W-2 withholdings are superior to quarterly estimates—no late payment penalties, simpler to manage, and more reliable.
• Payroll drives funding into retirement accounts, FICA contributions, tax payments, and living expenses.

Year-End Strategies That Work

• Time collections and expenses around year-end to manage taxable income.
• Use Section 179 and bonus depreciation wisely—match deductions to cash flow and tax bracket, not automatically.
• Deduct a legitimate home office to unlock additional auto and commute deductions.
• Put kids and spouses on payroll for significant tax savings.

Avoid the Pitfalls

• Beware of overly aggressive tax shelters (bogus goodwill deductions, misapplied R&D credits, or repackaged schemes marketed to dentists).
• Don’t rely on fragmented financial services—integrated payroll, tax, and planning creates efficiency and protection.

The Process

• Forecast taxable income.
• Apply strategies to reduce liability.
• Structure tax payments through payroll (and, if necessary, estimates for very high-income earners).
• Stay proactive—tax planning is a year-round process, not a last-minute scramble.

Transcript:

Wes Read: [00:00:00] Welcome back. It's Wes. Let's carry on. Financial planning for dentists turning financial chaos into financial freedom. I am doing really part two of the tax side of this. I just talking a lot about the mechanics of the way the tax process works. Hope you follow that. I think it's important to understand that because sometimes you've gotta direct your CPA.

You have to be the one that's intentional about your tax return being done and your tax planning, because a lot of CPAs are just so busy, they just don't stay ahead of it. And it's all last minute and none of us like that. And then boom, you get hit with a big tax bill unexpectedly, and it really sours relationships and turns a lot of CPAs, a lot of dentists, a bit against their CPA.

So in my perfect world at practice, CFO, if we do our tax planning right, you're gonna get a small refund, ideally. Perfect world. You're getting a thousand dollars refund. A lot of times our clients are getting a lot more than that. They're getting 5, 10, 15, $20,000 refund. Sometimes it's 80, a hundred thousand dollars.

For some of our bigger clients, it tends to be because I'm usually a little bit more aggressive preparing for the taxes that withholding a [00:01:00] little bit more because if there's one thing we all hate. Dentists, you hate this and I hate it too, is unexpectedly, are you looking to buy or sell a dental practice?

If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market. Many dentists selling their practice feel discouraged. That's why I built practice orbit.com. Practice orbit is modernizing how dental practices are bought and sold.

It's a platform technology. Y'all know them. Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and sellers made these technologies help them navigate the sale to a successful close.

Here are a few of the features. Inside a practice orbit, users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers, like practice brokers, [00:02:00] attorneys, accountants, and bankers, practice owners, and their brokers can invite those service providers into the platform.

So all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice, like a home on Redfin, and importantly, the listing will be anonymous and personal information like your address, name, and pictures are only released. After an NDA is signed and approved by you or your broker practice, buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location.

And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to practice orbit's. Large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers.

Additionally and optionally, you can use the platform tools such as a built-in NDAA, [00:03:00] customizable LOI, and a workflow tool to navigate the sale from LOI. To closing. In fact, you can manage all your listings on the system from listing the practice to NDA to LOI. And finally to closing the deal, create your free account today@www.practiceorbit.com.

Now at practice FOI really have all of our clients. As much as we can get them to do this, to change their payroll, to be the 15th and the last day with pay period, end date, a week before those points. So on the eighth. Is when the cutoff is for deposit on the 15th, because when you have a week, it just gives you breathing room and time to collect the hours, review them, authorize them, get everything in, and then on the last day, we'll usually do it, say on the, on the 23rd.

Sometimes that's gonna give you, you know, six days. Sometimes that's gonna give you eight days, but that usually gives you enough time. Sometimes February can get a little tight there, and, and it's very consistent. And the reason why I [00:04:00] like that a lot better than every other Friday or every two weeks. Is because I know that every payroll, every month of the year, there are two payrolls.

And so when I do a, a tax projection, it's a lot easier to plan how much to have per payroll because you don't have a month that has three payrolls, and if you're every two weeks, you got two months outta the year where you got three payrolls. And it throws off the tax, it throws off the whole cash flow.

Forecasting I like every month is the same amount. Going out for payroll pretty much, and not having these spikes twice, twice a year. And I think employees like that because they get, they have a paycheck fresh on the first day of the month to cover rent or, or mortgage payments on the first day consistently.

And then halfway through the month they have sort of a layover. With the paycheck, and that is by far the most ideal from a cashflow planning standpoint to do your payroll. Now, I bring that up, all that up to say that a lot of your taxes, your federal income tax, and your state income taxes are gonna be paid through your payroll.

For most clients at practice CFO, this is gonna be [00:05:00] probably 90% of clients at practice CFO, we pay 100%. 100% of their federal and state income taxes as a payroll deduction on their W2. So if you get the W2 at the end of the year where it shows the federal amount paid and the state amount paid, that's a hundred percent of the amount of income tax payments made.

Now, you may be asking, well, where else would you be making federal and state income tax payments through your estimated tax payments? And the, these are the two ways that you make tax payments. One is an auto deduction through your payroll to the IRS that shows up on your W2. The second one is you make, literally write a check or you go online to the IRS website.

And you, you have an account and you make your tax payment directly from your business checking account to the IRS outside of payroll. Those are the two ways and different CPAs will sometimes have you do it differently. Some CPAs have, you pay most of it as estimated tax payments. Some CPAs have you do it.

Through a hundred percent through the the W2, and some people will do it. A combination of both. Now, I want to [00:06:00] dwell on this subject a little bit. It's really important as a CEO, a business owner of an S corporation, that you understand this concept. There's two things that come out of your S corporation that land on your W that land on your 10 40 tax return and drive.

The vast majority of what you're gonna pay in tax. And the first one is your W2 outta your corporation, paying yourself as an employee. Now, if you're a partnership, you're issuing distributions. You don't have a W2 for yourself as an owner, you have just straight distributions or transfers from your partnership to you personally, or as my strong advice is to from the partnership to your S corporation.

And from there you run yourself a W2 to yourself personally. So W2 is the one thing that comes outta your. Corporation every year and lands on your 10 40. The other thing I'll in the other side of the teeter totter is your flow through profits, flow through profits, a flow through profit. Is the following.

It's your net profit in your corporation that you don't pay corporate [00:07:00] taxes on. Because S corporations are not subject to income taxes. They're simply a reporting mechanism. They're not a taxable entity, and so it flows through the profits, untaxed profits to. You personally, or again, if you're partnership, it flows those out to your corporation that owns your interest in the partnership so that K one flows out.

I'm gonna assume you're an S corp. It flows out from your S corporation and it lands on your personal 10 40 tax return. So now you got your W2 stacked on top of your K one. That's where the flow through profits is identified on your K one. And the sum of those two things unite. To B, what is your taxable income?

Now, add to that, of course, if you have a spouse who has income, you're gonna add that. If you have interest, dividends, rental income, capital gains, other forms of income will also be layered on top of your W2 and K one to arrive at taxable income. And then you'll have certain credits like the child tax credits and a few other things to ultimately arrive at what [00:08:00] you're paying in taxes.

Now, a lot of CPAs will have you do these quarterly estimated tax payments. Here's why I don't like. Quarterly estimated tax payments. There are two main reasons. Number one is its manual work and you are already so busy that I don't like to have to send you instructions to create your IRS account, or you don't necessarily even have to create an account, but you have to go online and make these payments or your state tax payments online or to write a check if you're a little bit more old school.

That way you have, it's a manual process. And you can't, you gotta do this. And if you forget to do it, then things are, uh, misaligned. And sometimes we think you made the payment and maybe you said you were going to make the payments and we assume that you did, but then you forgot. This happened a few times where we then file as if you made the payment, but you didn't actually make the payment.

And then the IRA sends you a letter saying, eh, you got that wrong. You have to make that payment. Plus a little bit of interest and penalty on that as well. And because we don't have visibility into your personal checking account, I don't know if you actually made the payment or not. Here [00:09:00] at Practice CFO, we often like to have you make, if you have to make an estimated payment, we have you make it outta your corporation actually.

And we call it a draw. But if we do that, it gives us visibility into it that you made it, we have evidence because we have access to your business checking account for accounting purposes. And now we, we can see that. And the way that we do things here at Practice CFO to be extraordinarily organized around this is we have on your QuickBooks set of account listings, things like your supplies and your labor costs and your phone bill.

You have the, this list of accounts that shows up on your profit and loss statement and balance sheet we have. In your distribution list, these are what are called equity accounts because they're not tax deductible in your distribution accounts. We will have different types of distribution accounts.

We'll have one for designated distributions for things like a big trip to Hawaii or funding a kid's, uh, one of your kids' tuition payments at college. It has a designated purpose when you pull that money outta your business. Other ones are surplus distributions. Those are the ones we didn't know about it, we didn't [00:10:00] plan about, and can really throw things off.

That's when doctors tend to overspend by using their corporate checking account as a backup, ATM. We don't like those. We try to prevent those and have a plan for every dollar. That's what good discipline and financial planning is, and that's what accelerates financial independence. We will have few others on there for different specified purposes of making payments.

So a lot of times we'll say, Hey doctor, I need you to make a $15,000 federal income tax payments. Now. Truth is the only doctors who are doing quarterly estimated manual tax payments are, are. Big hitters doctors doing three 4 million with taxable income above a million. The reason why is because there's not enough W2 for us to deduct sufficient taxes to cover their tax liability.

Keep in mind that the IS doesn't care how they get their taxes from you, either from a W2 tax withholding or from a quarterly estimated payment. It's all the same. It's 100% exactly the same. To the IRS, that doesn't matter. And what we don't wanna do is we don't want to pay you any more [00:11:00] W2 to yourself as an employee of your corporation than we have to prevent an IRS audit because they will audit you if you don't pay yourself sufficient W2, which is how they get their FICA taxes.

Or if you have a four oh K defined benefit plan, we may go all the way up to somewhere around 340, 300 50,000 as of 2025. In order to maximize your contribution into those plans, but we will never, ever want to go above. I can't think of any reason. Maybe if your net income was like $8 million, then a W2 relative to your net profits could be really low, even at 350,000, and we may bump up your W2 to five or 700,000.

Now, at the end of the day, your W2 never needs to be higher. Than what you would actually pay someone to do what you did. It really never needs to be higher than that. However, again, that 401k DB plan, you want your W2 to go up. You're gonna pay more in FICA taxes, but you're gonna pay a lot less in income taxes if you are maximizing these 401k safe harbor profit share plans.

And if you're older with real good cash flow, maybe your debts paid off. Then you can fund this thing called the cash balance [00:12:00] Defined Benefit plan, gobs of money, hundreds of thousands of dollars, two, three, $400,000 or more each year into the defined benefit plan, knocking off 80% of your tax liability.

And so when you're really making that much money, and we, and let's say you have to withhold $300,000 and federal income tax because you're making a $1.2 million a year taxable income. If that's the case, we can't get enough. W2, it's gonna turn your net. W2 deposit negative because you have more withholdings than your gross W2, and you don't wanna go negative.

So what we do is we sort of make a big chunk out of your W2 federal and state income tax payments, and then we'll have you make some quarterly estimated payments. So the first reason why. I don't like you to have to do quarterly estimated tax payments and prefer to run all your tax payments through your W2 is because relies on a manual process for you, and that's just kind of a nuisance to your schedule, and sometimes it's confusing.

The second reason is if you are late on your quarterly estimated tax [00:13:00] payments, which are due by April 15th, June 15th, September 15th, and then January, oh, I think it's. October 15th and then January 15th. If you don't make your quarterly estimated tax payments on time, then you're gonna be have a late payment penalty on that it the other, with the W2, there is no late payment penalty.

You could. Run zero payroll the whole year for you, and then you run one payroll deposit on December 31st. You process it around December 23rd to land before year end, and let's say it's a $380,000. Actually, like I said, you never go above that. It's a $350,000 W2. You withhold 200,000 federal income taxes.

You withhold 50,000 state income taxes. Guess what? That 200,000 federal and $50,000 state income taxes. Are not late. They're not late. They're treated as if they were made evenly throughout the year. So where quarter payments you're, you can be late on those that your W2 tax withholdings. None of those tax payments are ever considered late as long as your payroll is done by December [00:14:00] 31st.

This is why a lot of tax planning, the majority of tax planning has to be done. When I say the majority, I mean like 98% of the tax planning has to be done. Before December 31st in your practice, finances, and how about your personal finances? Ever wonder where your hard earned money goes and why you're not seeing the financial progress you've worked so hard for?

If so, listen up. As a dental CPA and financial planner, I've created our company practice, CF. Just for you. With almost two decades of experience practice CFO integrates great CPA services like accounting and tax with customized financial planning, both business and personal. Think of it this way, our dental focused CPA services give us the x-rays we need to clinically plan your global finances and be effective financial planners.

It's a highly custom. Optimiz approach, we call the CFO model. Historically, having a CFO or Chief Financial Officer was an advantage of [00:15:00] large corporations only. But today, practice CFO gives that same advantage to private dental practice owners. As a client of practice CFO, you'll be assigned one of our dedicated CFO advisors.

You'll receive insightful financial reports each month. Have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician.

Reach out to learn more@www.practicecfo.com.

And this is why we brought payroll in house. It was less about an added layer of revenue. I don't know if we make hardly any money on our payroll after paying our payroll team and 50% of our payroll, uh, revenue from clients goes to pay rippling the payroll technology provider that we use. The reason why we brought in house is because it's so, it's such a critical [00:16:00] lever when it comes to cashflow and tax and financial planning because in your payroll.

Determines how much you're funding into your 401k or defined benefit plan. It determines how much FICA tax you're paying and FICA tax is 15.3%. That's a lot. It determines our ability to make your estimated, your federal and state income tax payments through your payroll. It's how we determine how much is deposited into your personal paycheck, personal checking account in order to meet your living.

Expenses. It's where we can get kids and a spouse on payroll. Just so many tax planning strategies are going through payroll that we cannot have our clients on 30 different payroll companies. It would be an absolute nightmare. Mechanically, imagine if you had 30 different lab providers and every client that that came in, every patient that came in, you were using sort of rotating through all these different lab providers.

Or maybe you have like 30 different suppliers. It's just a nightmare. It's a nightmare to have a process around that. And so we, that's why we brought payroll in-house because we're not just trying to file tax returns. We were just a vanilla CPA [00:17:00] firm filing tax returns and doing base accounting. Probably not the end of the day, but because we're executing a plan for the future and forecasting and monitoring, the payroll needs to be in our operatory.

So if you're a prospective client and you're with GUSTA or a DP or whatever and you're like, ah, that's such a pain in the butt to uproot my payroll because it is, I get it. It, you just gotta know, this is for your benefit. Way more than it is for our benefit at practice CFO, for us to be doing your payroll.

And if a CPA financial planning firm that you have doesn't do your payroll, trust me, there's gonna be more inefficiency. No matter how much they try to coordinate a strategic partnership with that payroll company. There's not gonna be the same efficiency, accuracy, and execution when it comes to integrating these tax strategies that.

Funnel through your payroll. So it's been a painful thing for us, an incredibly expensive thing for us. We have, we we're out of pocket probably half a million dollars over the past six months just trying to bring payroll in-house because we have hired additional support to help through the conversion process, not wanting to [00:18:00] really charge our clients as much.

And so we've just sort of bit that bullet one step back to get two steps forward to really get our clients on our payroll processes to create better integration. And I'll tell you what, it gets a little bit rough. When you adopt a new payroll system, because there's a lot of layers to the payroll technology called rippling, uh, in there, and you gotta learn, you gotta set up authorizations.

I could have a whole nother podcast on this, that when it comes to payroll, meet with your payroll company before processing payroll a number of times. To make sure everything is configured in the payroll software that each of your employees payroll item, your your payroll items. That's their deductions.

Everything is configured, configured accurately. The pay time off your accrual methodology is set up and configured accurately. Your benefits are configured accurately. You need to go through every single employee with a. With, with a magnifying glass to make sure it's set up right before processing that payroll.

What's been happening is a lot of clients don't show up for [00:19:00] our training meetings when we switch over. And because of thinking it's not urgent, I'll get to that when I have to process payroll and then suddenly payroll time comes and they have a very short period of window to get everything configured and in place and it's chaos and the clients get really, really frustrated.

And I, this is why I, we've been since the day we, we said we're gonna bring over payroll. Meet with our payroll team to do these trainings and get it configured. So it's not a crisis when you go to run that first payroll, that's so important. Whether you're switching to us or anybody that you, an ounce of prevention is a worth pound of cure, take the time to configure it right in the beginning.

'cause our team will take the time with you to get that set up accurately. But we can't control what you're willing to do. You also gotta have your two FA set up. We had a case where a client was embezzled somebody, uh, uh, phished and one of the employees clicked on it. Two FA was not set up, create an employee.

That particular practice did not have an authorization in place, uh, for the doctor to approve payroll before it could process as well. [00:20:00] Or who knows, maybe they just kind of clicking on. I don't think so. 'cause this is a wonderful doctor who's very intelligent, but don't have the controls in place and the configurations in place.

You could be embezzled. Through payroll. It's a really unfortunate thing and it, it happens. So have your two FA on and make sure that you, the doctor, have it configured in there that payroll cannot technically, systematically in the software. It cannot be processed without you clicking a button to authorize it.

And please review it for a few minutes before you do. Authorized. I don't want you doing all the payroll and taking up hours of your time. It should take no more than about 10 minutes. But it, that's, that's what I highly recommend here. So on the payroll, that's why we brought payroll in-house here at Practice CFO, and I think we have a great payroll function.

And then we, we take the payroll data and we feed it into our client's QuickBooks account, uh, accounts in order to give really rich reporting on the p and l and our CFO analysis. About how much they're spending for their hygiene, for their assistant, for their front office, and comparing that up to [00:21:00] industry standards and how, how do you look?

How healthy are you? Again, the integration of this whole ecosystem is just so vital. That's why I do not like a un, an unbundled, fragmented, disjointed. Model where you have a financial planner over here and a tax planner over here, and an accountant over here and a payroll company over there, and a 401k over here, that Disjointedness gonna crush your ability to become financially independent because you're gonna have so much money getting wasted inefficiently through proper.

You're gonna have expenses, you're paying that you shouldn't be. You're gonna have an underfunding of 401k, you're gonna be paying more in tax planning, more in vendor fees, et cetera, et cetera. Integrated model is. What is so valuable, it's what I use for my own company, and it's what I obviously set up practice CFO for, is to provide that level of model for you.

Okay, so now back to the tax side of things. It was important to understand how payroll relates to your tax planning. Let's now go on to what are some of the things that you can do in your tax plan. Number one is [00:22:00] you can. You can do what's called timing, and I'm gonna go through some things. I'm not gonna go through a much longer list.

I'll do another podcast where I go through about 15 or 20 different tax strategies and explain those. But here are some key ones on the tax code that I talked about earlier. The set of stairs from 10 all the way up to 37. There are certain deductions you can get on your 10 40 tax return that you lose as you get into the higher stairs.

So once you get into roughly somewhere mid. 35% tax bracket, somewhere around $600,000 of taxable income, or really the technical term is your adjusted gross income or your A GI. Your A GI determines certain other deductions you get between a GI, your adjusted gross income. And your taxable income, which on your 10 40 tax return, those are two separate rows.

The taxable income is lower or under the adjusted gross income because your adjusted gross income determines certain deductions you get between those two. And so these are some strategies for if your adjusted gross income is around. [00:23:00] 600,000 to 700,000. Anything you can do to get it back down under that 600,000, can you get it down to 500,000, five 50 500,000 by funding more into your retirement plan or by delaying collections in that last week or two in December.

Sort of holding those checks or whatever, you know, and depositing in January, you're a cash basis taxpayer, not an accrual taxpayer, which means that you recognize income is taxable when it's deposited into your account. Now, if you were audited and the IRS knew that you were sitting on checks and you just didn't deposit them, yeah, they're probably gonna force that into the year.

But this is a very common practice. It's kind of that gray area. You know where you just haven't gone to deposit it yet, but if you hold off in depositing those last couple weeks in December into January, or you buy the first two months of supplies. For the new year and you pay for them in January, uh, as well.

Or if you can buy that cadcam or buy that new set of dental chairs, never buy it just for the tax deduction ever, ever. But if you're in [00:24:00] at that point of needing it, buy it in December instead of January, February. And these things in the aggregate, you know, get your kids on payroll, get that spouse on payroll.

You know, if you're gonna do a build out, there's just a number of things you can do here to try to go from that $600,000 mark. Where you lose things like your qualified business income tax a deduction, which is a really nice deduction on your 10 40, the child tax credit, certain dependent care credits, and there's a few others here that you can get as a tax credit or which is sort of like this bonus tax deduction if you can get your income tax lower.

So not only are you getting your income tax lower to save an income to save in in the income tax, but you're also layering on these extra credits and it's like a two for one. You lower your taxable income by a dollar and not only you get, do you get the 40% tax deduction normally because you get a credit.

It bumps that up to, to 50 or 55% of a tax benefit on that dollar. That's why these incremental marginal tax planning [00:25:00] around the the edges here. In this case, the edge is about 550,000 to $600,000. You can really get a lot of these extra tax benefit back tax benefits back and compound your tax savings.

Now, if your taxable income is over a million bucks, there's not a whole lot you could do to get down to five 50. At that point. You gotta. Big chasm that you got across DB plans are the best way to do that. 'cause you can fund three, $400,000 plus into these defined benefit plans and it's the dollar for dollar tax deduction and the vast majority of it, usually 95% or more is going to you.

With a little bit going to your team, but these only work when you're making serious cash flow. Maybe you've paid off your practice debt a little bit older. Your practice is humming along and you're older than your staff. The census data, the census around your age and your staff's age matters with these defined benefit plans.

Bottom line is once you get above a million dollars, we do what we can. It gets a lot more difficult at that point, but most dentists seem to, dental practice [00:26:00] owners tend to float somewhere around 350 to 700 to 800,000 of taxable income. And so those of you who are in that upper bracket maybe are maybe are $2 million practice with a 40% profit margin.

That's 800,000 profit margin. And that's where we can. Really get that 401k, really get the tax timing, really get kids on payroll. Really try to run through a lot of perks. So on that note, lemme go through some more of these. So, tax timing, timing of deposits, timing of, of expenses near the end of the year can make a huge difference.

Kids or spouse on payroll for every kid you put on payroll. If you're in California, you're, you're gonna save about 2,500 to 3000 a year. If you're in a different state, it might be less, maybe 1500 to 2,500 per kid, because you can pay them up to the standard deduction this year. That's 15,000. And they're not subject to income tax.

So you shift that amount of income that would've been taxed at your highest bracket is now taxed at a zero bracket on your kids. Now, some things you gotta think about there with kids' college education, is it gonna interfere with potential financial aid? A lot of our clients will also set up a Roth IRA [00:27:00] account for the kid and they'll deposit that money into their kids' account.

A lot of times we, you don't do that and the kids' payroll is literally deposited in the parents' account. It's purely a tax planning strategy. Or not even actually. Ping your kids, but it does show up on their W2 um, as well. So there's a number of factors to consider there, but that's a great one. We do for, for most of our clients with kids older than about five or six.

The home office, I'm a big fan of home office. Again, it's not huge, it's stacking nickels, but they add up and the home office deduction can, it can end up saving you, you know, four to $7,000 during the year, depending on how much you can justify. As cost to maintain your home office, your home office. A lot of CPAs are really against this.

I'm not, and I've never had an issue with an audit on this. If you have documentation to show that you use that home office exclusively and regularly for business, the way I would look at that is that I call it your administrative office. That's where you look at accounting reports. That's where you look at billing, that's where you sort of prepare for things and administrative stuff all happens there in your.

Administrative office and [00:28:00] that allows, therefore justifies any commute from your administrative office, IE your home to your practice. Now you can deduct car related costs from that. You can't just deduct your car because you bought it and claimed it as a, as a business cost. You have to prorate out what portion is it actually used for business and what portion is used for personal and normal commute.

Is not tax deductible. So those thousands of miles you travel every year and all the gas and the maintenance and the car wash, all that stuff related to that is not tax deductible related to the commute and, but when you have an administrative office outta your home office, now all of that is, and so now you go from deducting maybe.

25% of your car costs. Now you can get all the way up to, you know, 60, 70, 80% of your car costs if you really wanna push the envelope there, which we tend to do that around car costs because again, we are the advocate for you, not the IRS. And so we are gonna tow that line. Alright, so the home office, there's some rules around that, but uh.

That's a great one. Fixed assets. Fixed assets [00:29:00] is the accounting term for the big, tangible stuff you buy that provides benefit over a long period of time. Like your dental chair, like your ex Mayer machine, your co, your, your cone beam, your cad cam, maybe certain sensors build outs if you build out a new operatory, things like that.

All that stuff goes on your balance sheet as an asset. It doesn't go on your p and l as an expense, and therefore it's only deductible as you leak onto your p and l. From the balance sheet, a piece of it called depreciation. So you buy that dental, let's set of dental chairs for $50,000. Some really nice dental chairs and it goes on your balance sheet as this thing.

You own this asset called your dental chairs, and then every year you get to deduct $10,000 or so for five years and boom, and that's your tax deduction. However, the IRS gives you certain controls where you can accelerate those, that depreciation instead of getting it over five years. You can essentially front load a hundred percent of that through what's called a section 1 79 deduction.

You can get a lot through bonus depreciation, but you can at your discretion, move a lot of that forward. Now, CPAs tend to just automatically do that by [00:30:00] default without questioning it. Terrible, terrible planning. No, because if you're in a low tax bracket this year, for whatever reason, maybe you're younger, you just bought the practice, or you're going through something, or whatever it is.

You don't wanna accelerate tax deductions in the year when you're, when you're in the lowest tax bracket. So you may wanna spread it out as your taxable income goes up over time, for example. But, uh, this bonus depreciation, this, you could accelerate some of this in order to get your taxable income down into those lower brackets in order to recapture those bonus deductions like child tax credit and the QBI deduction and, and a few others there.

So, uh, depreciation around buying things now. A lot of times your suppliers will come to you and they'll say, Hey, you need to buy this cad cam. You need to buy this dental chair. You need to buy this stuff before year end so you can get this magical thing called the 1 79 deduction. Well, it's really not a magical thing.

All it is thing that allows you, again, to front load all the tax deduction into the current year. Either way. Either way. If you bought on January 1st, whatever, you're still gonna get a hundred percent tax deduction, but you're not gonna get in the prior [00:31:00] year. And really the tax deduction, the section 1 79 deduction, how you depreciate these big fixed assets that you're buying, like dental chairs, x-rays, cad cams, et cetera, how you depreciate those should be a function of when you're paying the debt.

And it should be a function of the need to depreciate it in order to recover some of those bonus deductions in the current year. There's a few things to consider here. With when and how to take that deduction. Also, running perks through the business. Things like your, your meals, certain travel. Certain things that are entertainment that maybe you could reclassify and call 'em marketing costs.

'cause you're with a, a potential patient. I mean, this is where it gets aggressive. It's where it's somewhat gray. I mean, the IRS auditor will say, no, it's not great. It's black and white. It has to be true business expense. It's gotta be a customary and usual business expense. It's, you gotta parse out what's used for personal.

There's all these other things, but for the most part, yeah, it is not, you're not gonna be audited. And there's at least a leg to stand on. If for some reason you ended up in front of a tax judge, [00:32:00] blah, blah, blah. Probably never, ever, ever gonna happen unless you're completely egregious and do tax evasion.

You know, it's usually, it's usually these extremely complicated strategies that tax attorneys will come in the market at your state society and they'll tell you, if you do these things, you're gonna essentially eliminate your taxes. So much of that, honestly, it's tax evasion. It tax evasion, but it sells so well.

It sells extremely well because it's like, really, I can get a hundred thousand dollars of taxes back in my pocket if I have you do this work, and I sign at the, at the bottom of the bottom line and get the, give this form my tax EPA. I mean, for example, I've done episodes on the um, r and d tax deduction, the research and development tax deduction.

This is a tax deduction that's really created for people who are innovating. Something through deep research that produces a new way of processing a new product, a new system, something that's that's new in the, the business that's even potentially industry changing, but that has the risk of [00:33:00] you never recovering the research expenses that you put in that.

Now these guys will come to you and tell you, well, as a dentist you really read the rules closely. You can do this, this, this, and this, and you can meet all the check boxes inside the r and d tax law, and you get this great tax deduction. The truth is, the vast majorities, if you are audited, the IRS is gonna overturn that.

They will, most of them won't. And so if you want to take that risk, and in this case, to me, that's tax evasion because it isn't, it clearly isn't what a research and tax development is. Now, if you're trying to truly create like a new toothpaste. Or a new technology, maybe some new loops or something like that.

So that's, that are different and innovative. Yeah, that absolutely satisfies for the research and tax credit 'cause that's what it was designed for. But you just milling crowns, I'm telling you that is not gonna satisfy the intent of the RD tax credit. There's that one I've allowed, I won't say allowed, 'cause I don't, at the end of the day, I don't dictate what you decide on your tax return.

But remember your CPA's name. [00:34:00] In this case me goes on the bottom of your tax return as well. And so we have a certain amount of liability protection that we have to do for us because as I said, if the iris is smart. And they've done this, and they may do it more in the future, is they will find the CPA that it allows tax evasion and then they'll audit everybody on their tax.

So that's why we will try to tow the line, but we really also have this dual mandate. In addition of saving taxes, we really need to prevent you and our clients from tax audits 'cause those are nightmares and they'll audit multiple years at one time and it'll be very costly. Do you please avoid these different.

Trusts or tax strategies. Here's another, here's another ridiculous one that was going around selling, saying, Hey, doctor. Uh, you know, you have this goodwill in your practice. The book value on your balance sheet of your practice may say $200,000. 'cause you've amortized and depreciated all of the stuff that you bought, including the acquisition of the practice, the goodwill, all of that.

So the book value on your financial statements is 200,000. Your practice [00:35:00] could sell for a million dollars. That $800,000 spread, this is goodwill that you've created. We're gonna, there's this esoteric part of the tax code where you can capitalize that, put it on your balance sheet as $800,000 and start to deduct that through amortization on your p and l and dramatically lower your taxes.

That, frankly, is just b. No, you can't. You can't suddenly create a, an accounting journal entry for amortization without a transaction. The transaction occurs when somebody buys your firm for a million dollars, your practice, and then that does become an asset on the buyer's balance sheet. And when you bought a tax return, that's how you.

That that goodwill was capitalized as an asset on the balance sheet and then amortized over time. Now this is, may sound a fairly technical for you, maybe rewind, listen to it a few times. Um, you may not need to understand this level of depth, but just be very cautious about what you're being sold from some of these sort of tax shelters, because a lot of these things.

Move past the gray area and into the tax [00:36:00] evasion area. And I'm sure those attorneys are gonna debate me, but I'm telling you, they're, they're not gonna be the ones holding li the liability in the bag, uh, when you're audited and have to pay mass amounts of taxes and penalties on that. Okay, so let's carry on the perks again, I'm a big fan of running as much stuff that we can sort of legitimize through the practice.

A lot of you run a lot of Costco and a lot of Amazon through the practice and a lot of that is probably for personal here at Practice Info. There, it's just impractical for us to ask what every Amazon cost is for. And so we just, uh, plunk it all to office supplies and it's a hundred percent tax deductible, and we educate you that it should technically be for a, a, a business expense, and then it's on you.

Okay? Now, there are a lot of other things you can do, but I'm gonna end there with just some of the examples of what you do. Now, a lot of this is just casting a wide net. And you're pulling it in and you're getting a quarter deduction here, you're getting a dollar deduction here, maybe $2 over here.

That's metaphorically speaking, they're much bigger numbers, but you're getting a lot of tax deductions layered on top of each other that then make a huge impact. And kind of the [00:37:00] silver bullets, the big ones tend to be these 401k profit share plans. And also the defined benefit plan is an absolute silver bullet.

They're delicate. They're a little bit of the prima donna in the ERISA retirement plan, uh, space, these defined benefit plans. But when managed and intended carefully, they are just amazing, amazing tools and they are very safe tools as well when managed correctly. Alright, now, now that we've done the forecast in, in our process, we've done the forecast, we.

Determine what our tentative tax liability is. Then we start applying all these strategies to structure levers to get that tentative tax liability down to a much lower number. Then from there, it's time to make sure that you've paid on time, and that's where you say, if I'm gonna owe a hundred thousand dollars during the year and I've got 10 paid periods left, I need to withhold $10,000 per paycheck.

Maybe that's $7,000 fed, $10,000 state, whatever that is, but you just simply do the math about what you're gonna owe. What's. What's left to owe that you haven't already paid in? What's left that you're gonna have to pay in divided by the number of pay periods [00:38:00] left equals the amount that you have withheld from each pay period fed and state.

And now you have to sort of integrate that also, or weave it in to the other planning items with your payroll. About how much net do you need to live on, what your gross W2 should be to maximize your 401k and uh, uh, retirement plan contributions. So then you're, now, you're paying it throughout the year by the end of the year.

Theoretically you'll have paid in a hundred percent of your tax, your, your reduced through strategy, tax liability. That's good tax process right there. Project annualize. Determine your tax liability, strategize to get it down, put into motion your tax payments through payroll and or through an estimated tax payment program.

Don't be let and you are. Good. Alright everybody. That is step three a business financial planning, turning financial chaos into financial freedom. And in the next episode that I'm gonna do, we are going to cover [00:39:00] your. Payroll structure for the year for US corporations, this is critical and there is a lot unnecessary taxes and expenses paid because this is done absolutely wrong.

I can't think of a single time when a prospect came to me. I looked at their W2 and I was like, yep, that was done exactly right. At least according to my clinical philosophy. Now, maybe there were some that were very, very close, or maybe there were some that were spot on, but the majority of the time, not necessarily, and though that's where we get turning and we get to work, organizing all of the financial data.

Really good financial reports. Now we have our vis, our visibility, our financial x-rays. Now we can do this tax process of forecasting, strategizing, and setting up a payment planned throughout the year and not being behind. Alright, until next time, have a great day everybody.