TaxStrategy and Mitigation for Dentists
TaxStrategy and Mitigation for Dentists
Everynew administration often has new tax proposals that aim to achievevarious goals for the populace. The tax proposals also affect varioussectors of the economy depending on the understandings of the partyand presidential candidate making the plans. It is, therefore, thework of stakeholders in every sector of the economy to find ways tocircumvent proposed tax changes with the aim of mitigating adverseeffects. One such sector is the health sector, which is likely toexperience tax cuts in the tax proposal for the impending DonaldTrump administration (Ydstie, 2016). Dentists have the opportunity toanalyze President-elect Donald Trump’s tax proposals in order toidentify potential tax strategies and mitigation procedures that canwork in such a tax regime. The analysis will highlight the impact oftax changes on various income groups and the way they impact directlyor indirectly affect revenues, service delivery, and the quality ofdentist-client relationships. In order to highlight the kinds of taxstrategies and mitigation procedures that dentists can use, it is,consequently, vital to provide some significant tax proposals byPresident-elect Donald Trump.
Trump’sTax Plan
TheUnited States currently has seven tax brackets, but president-electDonald Trump proposes to reduce the brackets to three and abolish thehead-of-household bracket of tax filling. Married couples will have$30,000 standard deduction where they will be required to filljointly while single individuals will a standard deduction of $15,000(Batchelder,2016). The tax plan proposes presents an increase from $12,600 and$6,300 for married couples and single individuals respectively. Thefollowing table indicates the three tax brackets under the new plan:
Table1:
Taxbracket under the new plan
|
Tax Bracket |
Single |
Head of the Household |
Married filing Jointly |
|
12% |
$0-37,500 |
N/A (Single-filer rates) |
$0-75,000 |
|
25% |
$37,500-112,500 |
N/A (Single-filer rates) |
$75,000-225,000 |
|
33% |
$112,500+ |
N/A(Single-filer rates) |
$225,000+ |
Source:Tax Policy Center
Trump’stax plan as shown in the table shows that there is a general decreaseof taxes across income brackets. A dentist should, thus, analyzefurther to establish the potential change that will happen tospecific income groups because it matters most. When people have moreaccess to medical cover and a higher disposable income, dentists willearn more due to increased clientele. In the table, a family with anannual income between $40,000 and $50,000 will only have a $560 taxcut, meaning that the effects may not trickle down as expected(Ydstie,2016). In fact, single-parent families in the middle-class will havean increase in tax bills under the new plan. A single parent earning$75,000 a year and possibly paying for all medical expenses andschool fees for two children will have their tax bill increase by$2400 or more. Single-parent families are likely to have the highestincrease because their earlier exemption under the “head ofhousehold” clause will be abolished under the new plan. A singleparent taking care of three school-going children will have a net taxincrease of $1,188 especially if they do not have childcare costs.Dentists should particularly be interested in the net income of afamily in all tax brackets after the plan is implemented. Besides,they should also be concerned about the impact of the plan on the gapbetween income earners. The tax plan seeks to completely do away withthe federal estate tax creating an even higher concentration ofwealth among the richest members of the society. The tax plan alsoseeks to make some reversals on medical packages such as theAffordable Care Act, making many people have to pay for dentistservices right from their pockets rather than under the insurancecover.
TaxStrategies and Mitigating Measures
Nowthat Trump’s tax plan may not cause a lot of changes in terms ofthe net income of current and potential clients for dentists, theyhave to come up with tax strategies that will cushion them fromclients who end up not paying their invoices. The tax strategiesinclude but not limited to the following
Makea Bad Debt Deduction Claim
Trump’stax plan proposes a drop of business tax from 35% to 15%, meaningthat all a dentist will have 85% of profits as opposed to 65%(Ydtstie,2016). Now that bad debts affect the level of profitability, dentistfirms can take advantage of the proposed tax cut to list potentialdefaulters and the reasonable debt collection steps that have failedto recover lost payments (Michael& Company CPA,2016). Successful bad debt deduction claims will increase the amountof profits.
MakeStrategic Price Allocations
Dentistsshould be aware the sales price of their practice is vital, but theproportion of proceeds that goes into their income is even more vitalbecause it defines the success of a dentistry hospital. The way adentist allocates the price of their practice has tax implicationsthat call for requisite tax mitigation. The Internal Revenue Servicerequires dentists to allocate the total price of their practice tothe various assets they use at a fair market value. Tangible assetsare taxed as normal income “above basis” (TheDental Transition Newsletter, 2014). “Above basis” is a term usedto mean the difference between the depreciated value of a tangibleasset and its sales price, which is zero. Intangible assets such asgoodwill will be taxed at 15% of capital gains. Dentists should beable to negotiate with buyers of their services to allocate a lowervalue denoting the fair value of their tangible assets and a highervalue indicating the fair value of their intangible assets such asexperience, professional recognition, and patient records. In orderfor both the dentist and the buyer to benefit from the allocation,the negotiation must it fair for both. It is worthwhile to hire theservices of a practice broker who will help a dentist come up withthe optimal fair value of assets.
StockSale
Dentistsshould consider operating their hospitals as incorporated companies.Now that Trump’s plan promises to cut the tax on profits andcapital gains to 15% sale of stock in a company offering dentistryservices, dentists will definitely produce a lot of tax savings.Taxes on capital gains from the sale of stock are exclusively at thelower fix (The Dental Transition Newsletter, 2014). Ordinary incomerates that most dentists use are at a higher tier than capital gainsfrom the sale of stock. Dentist companies should discount sales pricein order to attract more buyers to agree to buy their stock. Thediscount rate should be more than 30 percent because it offsets theloss of tax benefits under the Trump plan for buyers within variousincome tax brackets.
StrategicSales Timing
Dentistswho have plans to retire after selling their practice should do soone year after they have fully determined effects of Trump’s taxproposals on capital gains (Batchelder,2016 Michael& Company CPA,2016). When a dentist retires, their ordinary income will determinetheir tax bracket, which often drops. In this regards, it is smartfor a dentist to wait for a year for IRS to apply taxes on short-termcapital gains rather long-term capital gains because the formerattracts a lower tax rate.
Misclassificationof Workers
Adentist firm should be careful when classifying workers. It is oftendifficult to classify workers for purposes of employment tax andincome tax withholding. Many dentists are likely to misclassify someemployees as independent contractors. For employees, the companyshould pay unemployment taxes, withhold FICA taxes and federal incometaxes, and pay its share of the FICA taxes. The company should notwithhold income tax for independent contractors and they are liablefor self-employment taxes. Independent contractors do not attractFICA and unemployment taxes.
References
Batchelder,L. (2016). Familiesfacing tax increases under Trump’s tax plan.Tax Policy Center Urban Institute & Brookings Institution.Retrieved 2 January 2017, fromhttp://www.taxpolicycenter.org//sites/default/files/alfresco/publication-pdfs/2000983-Families-Facing-Tax-Increases-Under-Trumps-Plan.pdf
Michael& Company CPA(2016). How to follow the rules when writing off bad debts. only fordentists. OnlyFor Dentists.Retrieved 2 January 2017 from http://onlyfordentists.com/blog/
TheDental Transition Newsletter (2014). Top5 reasons to hire a practice broker: Selling a dental practice is acomplicated process. Don’t go at it alone.McLerran + Associates. Retrieved 2 January 2017 fromhttp://dental-sales.com/wp-content/uploads/2014/11/McLerran-Q4.pdf
Ydstie,J. (2016). Who benefits from Donald Trump`s tax plan? NPR.Retrieved 2 January 2017, fromhttp://www.npr.org/2016/11/13/501739277/who-benefits-from-donald-trumps-tax-plan
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