Dental Office and Personal Tax Planning for 2021 and Beyond
In a normal tax year, our tax planning strategy would be to minimize taxes now and worry about next year’s taxes, well, next year. 2021 is a bit of a different beast because we are assured of having a set of tax rules in future tax years less favorable than the ones we currently have. I will first describe “normal” tax planning strategies and then lay out why you may want to flip that upside down for this year.
“Normal” Tax Planning: Defer Income and Accelerate Deductions
For cash-basis taxpayers (most dental offices), income is taxable when received, even prepayments for future services, which creates limitations to tax planning related to the receipt of income.
You may defer the invoicing of end-of-year cases (patient pay, obviously) until the next year, thus moving the taxability of that income into the next year.
Paying bills in the last week of the year is an effective way to pull future expenses into the current year for tax purposes. Common examples include rents, supplies, and labs.
The timing of a deduction is governed by when the transaction is initiated. Checks clearing in the next year are deductible in the year in which they were written. This does not mean you can write a bunch of checks before year-end and stick them in your desk. They need to be mailed prior to year-end to secure the deduction.
The same rules apply to credit card transactions even if you do not pay the credit card bill until the next year.
The tax rules still treat small business capital expenditures favorably, and it does not appear these rules will be altered in the Build Back Better Plan legislation.
Generally, non-real estate investments in your business – equipment, technology, furnishings, etc. – may be deducted in the year placed into service.
“Placed into service” = ready for action (not sitting in a box)
Financing of the expenditure does not alter the timing of the deduction.
Maximize retirement plan contributions: $19,500 ($26,000 over age 50).
Discretionary profit-sharing plan contributions may be made after year-end and tossed back into the previous year for tax purposes.
Cash balance plans offer even greater contribution/tax deduction potential for those with consistently high earnings and cash flow.
Business real estate is deductible over 39 years.
IRS rules allow for carve-outs of items that may be deducted faster. Examples include land improvements, wiring and plumbing that feed specialized equipment, and custom cabinetry and finishes.
A cost segregation study is advised for identifying these faster deduction items.
These faster deduction items commonly account for 35% or more of the building investment (not including land).
Charitable contributions may offset 60% of gross income.
Bunching deductions (doubling up charitable contributions every other year) is key to maximizing the tax benefit unless you are well above the standard deduction amount ($12,550 single, $25,100 married) every year.
Donor advised funds (DAFs) are helpful when you want to deduct now and decide on your target charities later.
Donating appreciated property is a winning strategy.
Remainder of 2021: Accelerate Income and Defer Deductions?
The Build Back Better Plan (under construction) has a few provisions that ought to encourage many taxpayers to pull income into 2021 and push deductions into 2022, which is the opposite of what I would normally recommend. Expected provisions include:
39.6% ordinary rate beginning at $400,000 income (single) and $450,000 (married).
25% capital gains/dividends rate beginning at $400,000 income (single) and $450,000 (married).
3.8% net investment income tax to S Corp owners.
Other Build Back Better Plan Provisions (subject to change)
Estate and gift exemptions rollback from $11.7 million to $6 million.
Estate valuation limitations on discounts for non-business assets.
Retirement plan contribution limits on high-balance plans of high-income taxpayers.
New required minimum distributions on high-balance plans of high-income taxpayers.
Elimination of “back-door Roth” contributions for high-income taxpayers.
“High balance plan” = $10 million.
“High income taxpayer” = $400,000 income (single) and $450,000 (married).