Feel free to contact J. Haden Werhan, CPA/PFS, principal and owner of Thomas Wirig Doll, an accounting and wealth management firm that works with dentists. He can be reached at haden@twdadvisors.com or (877) 939-2500.

J. Haden Werhan, CPA/PFS

	With year-end approaching it is time for dentists to think about making equipment and technology purchases if they want to expense (depreciate) those assets on their 2016 tax return.

	While the rules for depreciating equipment have changed dramatically, one thing remains constant. Equipment must be “placed into service” before any depreciation may be taken. Planning ahead with a Dental CPA can save dentists and their equipment vendors a lot of stress at year-end and ensure that this important rule can be properly adhered to.

	In case you missed it, on December 18, 2015, Congress passed and the President signed into law the "Protecting Americans from Tax Hikes (PATH) Act of 2015.”  You can read about the legislation in the January 20, 2016 edition of 

What Dentists Need to Know About Taxes in 2016

	Depreciation is a deduction designed to enable business owners to recover the cost of equipment and certain other property used in their trade or business. It is an annual allowance for the wear and tear, deterioration, or obsolescence of that property. The concept goes back to the industrial age for accounting purposes. Early corporations – largely the railroads – needed a way to report positive income to attract investors. By spreading the cost of capital assets over time instead of reporting the expense in one year, corporations were able to report more consistent profits. Then, in 1913, along came income taxes. 

Related reading: How to time major purchases to improve your tax position

	There are dozens of formulas for calculating depreciation for tax purposes and various kinds of property are assigned different useful lives over which they are depreciated. Dental equipment and technology are typically depreciated over 5-years. Furniture and fixtures (dental cabinets) 7-years; certain (qualified) leasehold improvements 15-years; and other improvements including buildings & structures (not land) are depreciated over 39-years. Timing is important in the selection of a depreciation method. If more than 40% of one’s annual expenditure for tangible (depreciable) property is placed into service after October 1

 of a calendar year, the amount of depreciation allowed for that year is severely limited.  Planning one’s expenditures over the course of a year is critical and may include the use of accelerated methods for calculating depreciation. 

	Of particular interest to dentists and their vendors was the reinstatement of and making permanent the $500,000 expensing limit on 

 179 depreciation. While most dentists would not need to accelerate depreciation to this extent, it is nice to know that a large amount may be deducted if it make good business and tax sense. For example, if a dentist purchases new technology such as a computer system, digital radiography – X-ray machines, sensors, etc., for $80,000, and has to spend $20,000 for cabling and installation, she may deduct the full $100,000 this year under Section 179. Alternatively, to manage her tax brackets and maximize the benefit of the deduction, she may chose to take $25,000 of Section 179 and depreciate the remaining $75,000 over 5-years. Why waste the deduction in a 25% or 28% tax bracket if you know you will be in the 35% or 39.6% brackets going forward? Speaking of tax brackets, Section 179 may not be used to create a taxable loss in one’s business. If a dentist’s net income is $50,000 and they elect Section 179 of $100,000, then $50,000 is utilized this year bringing the net income to zero, and the remaining $50,000 is carried forward and deducted the following year, to the extent there is taxable income, as opposed to being written off over 5-years.  Another limitation may exist for dentists practicing in corporations.  Section 179 depreciation, and taxable losses, are only deductible in corporations to the extent that corporation has “basis” or equity.  Here is the math:

	            Beginning Retained Earnings          $ 50,000

	            Add:  Net Income                                100,000

	            Less:  Distributions                             - 80,000

	            Ending Retained Earnings               $ 70,000

	Section 179 Election                                         25,000

	Remaining Basis or Equity                           $ 45,000

	Dr. White has no problem with basis and may deduct $25,000 under Section 179.  Then there is Dr. Black who takes excessive distributions from his corporation:

	            Less:  Distributions                           - 160,000

	            Ending Retained Earnings               $ -10,000

	Section 179 Election                                          25,000

	Remaining Basis or Equity                           $ -10,000

	Dr. Black’s Section 179 deduction is not allowed and will be carried forward until there is sufficient basis. 

	Equipment vendors express frustration with dentist’s CPA’s who tell their clients that they can’t take Section 179.  The conversation usually stops there and the sale is lost. A dental CPA will explain the concept to their client and the vendor and point out alternative methods for depreciating equipment because they understand the benefit of incorporating new assets and technology into a practice.

	Also included in the PATH act was the reinstatement of Bonus Depreciation. Through 2017, 50% of eligible expenditures may be deducted but, going forward, it will be 40 percent in 2018 and 30 percent in 2019 after which Bonus Depreciation goes away. Bonus depreciation came about after 9/11 and it was limited to the areas in New York impacted by the devastation to help business rebuild. At its inception, bonus depreciation was 30%. The allowance has gone up (and down) over the years due to various tax stimulus packages.

	Bonus depreciation is available for qualified property that meets the following requirements:

	·  New depreciable assets with a recovery period (useful life) of 20 years or less, “off the shelf” computer software, qualified improvement property (39-year depreciation) and qualified leasehold improvement property (15-year depreciation);

	· Original use must begin with the taxpayer; and

	· Placed in service before Jan. 1, 2020.

	Unlike Section 179, bonus depreciation may be used to create a taxable loss but, as pointed out above, dentists practicing in corporations must have basis in order to deduct a taxable loss.

	The Path Act created the qualified improvement property category to make certain improvements eligible for bonus depreciation. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. Qualified improvements do not include: 1) enlargements; 2) elevators/escalators; and 3) internal structural framework. Qualified improvements do not need to be pursuant to a lease.

	The Path Act changed the rules for depreciating qualified 

 improvement property giving such improvements a 15-year useful (depreciable) life. Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property and placed in service more than three years after the date the building was first placed in service. The landlord and tenant cannot be a related party and the improvements must be made pursuant to a lease. In other words, if a dentist owns the real property in which the practice is located, 15-year depreciation on leasehold improvements is not available and the 39-year method must be used.

	Regardless of whether one takes Section 179, Bonus, or regular depreciation on new assets, those new assets must be 

 before a deduction may be taken. Placed into service means just what it says; if you want to write off your new computers and digital radiography equipment, you have to be using them on patients.  When assets are paid for has no bearing on whether they are depreciated in one year or the next. Also important to note is that Section 179 and regular depreciation may be taken on business assets whether they are new or pre-owned. To take advantage of Bonus Depreciation, assets must be new, meaning that their first use must be with the taxpayer taking the deduction. It is also important to note that not all states comply with federal regulations for Section 179 or Bonus Depreciation. Check with your Dental CPA member of the Academy of Dental CPA’s which consists of 28 firms nationwide.

Articles

With year-end approaching it is time for dentists to think about making equipment and technology purchases if they want to expense (depreciate) those assets on their 2016 tax return. While the rules for depreciating equipment have changed dramatically, one thing remains constant. Equipment must be “placed into service” before any depreciation may be taken.

3 things dentists need to know about year-end purchases

	Tax extenders! They have been in the news every year since the expiration of the Bush tax cuts and various other tax and economic stimulus packages. Without the passage of tax extenders in recent years, dentists would have had higher taxes. These temporary tax provisions expired at the end of 2014 but, as expected, new tax extender legislation has been passed.

	On December 18, Congress passed and the President signed into law the "

Protecting Americans from Tax Hikes (PATH) Act of 2015

," funding the government and providing a number of significant tax changes. The most notable aspect of this legislation is that unlike previous tax extender packages, the PATH Act makes most of the provisions permanent – and retroactive for 2015. Most notable for dentists, and their good friends who sell dental 

, are the rules for writing off those purchases.

More from J. Haden Werhan: Goodwill hunting: Branding and tax implications

	The Act retroactively extends and makes permanent the $500,000 expensing limitation and $2 million phase-out amounts. Both the $500,000 and $2 million limits are indexed for inflation. Without the PATH Act, 

 would be limited to $25,000 and the phase-out amount $200,000. If one exceeds the phase-out amount in any given year, they are not eligible to use Section 179 that year.

	For dentists building new offices, the $200,000 phase-out limit was a significant problem. In addition, qualified leasehold improvements (see below) are eligible for the Section 179 deduction. The dollar limit was $250,000 but the PATH Act removes that ceiling starting in 2016. So, a dentist who made qualified leasehold improvements in 2015 may take a Section 179 deduction of up to $250,000. For improvements made in 2016, the limit is the same as above - $500,000.

	There are a variety of factors and rules to take into account when contemplating the use of Section 179 including one’s tax situation, the amount of debt taken on to making those improvements, and, for those dentists with S. Corporations, the income and basis in the corporation.

More on Section 179: Congress passes Section 179 extension ... what that means to you and your dental practice

	The Act retroactively extends and makes permanent the inclusion of 

 in the 15-year depreciation schedule. Qualified leasehold improvements are those made by or for a lessee, not an owner/user. Dentists who rent space will depreciate improvements over 15 years but those who own their space (dental condo, free-standing building, partnership interest, etc.) must still use a 39-year depreciation schedule.

	Therefore, it is important for such owners to have a Cost Segregation Study performed to re-allocate improvements into shorter depreciation categories as appropriate. Also starting in 2016, The 2015 PATH Act removes language in the tax code that excludes air conditioning and heating units from being Section179 property. Previously, HVAC units were depreciated over 39 years.

	The immediate expensing of new assets placed into service that have existed in a variety of forms since 2001 will end after 2019. In recent years through tax extenders, Bonus Depreciation has been 50 percent of qualified purchases. It will be 50 percent for 2015, 2016 and 2017 before going down to 40 percent in 2018 and 30 percent in 2019. To be eligible for bonus depreciation, property must be tangible depreciable property with a life of 20 years or less, computer software, or qualified leasehold improvement property. Also, the original use of the property must commence with the taxpayer meaning that used equipment doesn't qualify.

	The PATH Act makes the following tax attributes permanent:

		The American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education.

		The $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom. The $250 is indexed to inflation and may now include professional development expenses.

		Pre-tax mass transit limits will be permanently set equal to the pre-tax parking benefit limits. The change is retroactive for 2015. As a result, the allowable pre-tax mass transit limit for 2015 increased from $130 to $250 per month. The monthly mass transit limits for 2016 will also increase to $255 per month.

		The option to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes.

		The increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.

		The provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70.5 or older.

Trending article: Section 179: Why dentists need to act now [VIDEO]

	There is much more included in the new legislation. It suspends, for two years, two new taxes that were installed as part of the health care reform law: (1) the excise tax on medical devices (which was effective for sales after Dec. 31, 2012) won't apply to sales between Jan. 1, 2016, and Dec. 31, 2017; and (2) the 40 percent excise tax on high-end health insurance plans, known as the "Cadillac tax," which would have applied beginning in 2018, will instead apply for tax years beginning after 2019.

	The exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income is extended through 2016. The new law also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016. The deduction for mortgage insurance premiums deductible as qualified residence interest is extended through 2016 as is the above-the-line deduction for qualified tuition and related expenses. The $8,000 increase in first-year depreciation cap for business automobiles is restored and extended through Dec. 31, 2019.

Trending article: Supreme Court dental regulatory board case examines federal antitrust laws

	As for solar energy property, the new legislation extends the temporary 30 percent energy credit for solar property from its current expiration after Dec. 31, 2016, for three additional years through 2019. The energy credit for solar energy property will then be phased out, providing a 26 percent credit in 2020, and a 22 percent credit in 2021. For any property that is under construction before 2022, but not placed in service before 2024, the energy credit is reduced to 10 percent. Similarly, the new law extends the temporary credit for solar residential energy-efficient property.

	Like any new tax legislation, The Path Act of 2015 and the Consolidated Appropriations Act of 2016 consist of volumes of text. In addition to the good tax news for dentists outlined above there is other good news associated with these bills. First, the fact that the legislation was written, passed by both houses, and signed into the law in such a short period of time and with so little partisanship and fanfare, is encouraging from a political standpoint. Second, because so many of the tax extenders were made permanent, there is much less for politicians to argue over in the future.

Trending article: The top 7 dental news stories of 2015

	Lastly, with the uncertainty about how much dentists can deduct when purchasing new equipment and technology, or building new dental offices removed, planning for those purchases and the related tax results will be much easier for dentists and their dental CPA’s.

Tax extenders! They have been in the news every year since the expiration of the Bush tax cuts and various other tax and economic stimulus packages. Without the passage of tax extenders in recent years, dentists would have had higher taxes. These temporary tax provisions expired at the end of 2014 but, as expected, new tax extender legislation has been passed.

What dentists need to know about taxes in 2016

	Two experts offer advice designed to help you when it comes time to plan for transition or retirement.

When it comes to transition or retirement, dentists have several options.

	They can sell their practices, find associates or simply throw their hands up and reduce office hours and production until they end up closing shop. One option dentists don’t have, however, is to cross their fingers and hope for the best. Ideally, a doctor should start planning for retirement a minimum of five to 10 years ahead to fully maximize the value of the practice he or she has spent so many years carefully building.

	Planning for transition is a process, one full of many variables, but dentists nearing retirement age can take the guesswork out of the process by keeping the intersection of two important areas ­- branding and tax implications - top of mind.

	Some dentists believe it’s best to leave the rebranding process up to their successor so the new dentist can do whatever he or she wants with the practice name after taking it over. While that may at first seem logical, it is actually an inherently flawed plan. In reality, taking the steps to rebrand the practice and develop a transferable asset, and an identity within the community that transcends the identity of the practice owner prior to retirement, will pay off in dividends upon retirement.

	In fact, doctors within five or even 10 years of retirement should consider changing the name of the practice well in advance of a potential practice sale to prime the pipeline of potential buyers. After all, what is “Jess Jones DDS” really worth without Dr. Jones?

More from Naomi Cooper: Top tips for designing a modern dental practice website

	Dentists have the unique opportunity to forge long-lasting relationships with their patients, and much of the reputation of a practice is inextricably tied to the dentists themselves. It’s important to maximize the practice’s value when it’s time to sell, and having all of its brand equity wrapped up in the primary dentist’s name means one of the practice’s most important assets isn’t transferable.

	Furthermore, it means any young dentist considering purchasing that practice knows he or she will have to take on a considerable up-front marketing burden in addition to the price of purchasing and financing the practice and any equipment/facility upgrades.

More from Naomi Cooper: 7 tips for using social media to reach patients of all ages

	Imagine the fictional Dr. Pat Price, who is 30 years old and shopping around for a practice in Springfield. There are two practices up for sale in town with nearly identical locations, patient bases and facilities. Practice A is named Jess Jones DDS after the long-time dentist/owner. The practice’s website comes up on the first page of search engine results for dentists in the area, but the URL is drjonesdds.com and its signage and business cards all reflect the retiring doctor’s name. The practice’s Facebook page and other social media profiles, as well as all of its overwhelmingly positive online reviews, are also all listed under Dr. Jones’ name and worthless to young Dr. Price, as a result.

	Dr. Price knows if he is to buy Dr. Jones’ practice, the cost of a new logo, internal and external signage, a new practice website and printed materials like business cards and letterhead alone will easily rise into the mid-five figures. Add to that the cost, including the time and energy, of rebranding the practice, building a new website and starting the practice’s social media and online review profiles from scratch and putting the necessary marketing infrastructure into place for this practice starts to feel like a part-time job the new dentist won’t have time for.

	Practice B, on the other hand, was rebranded several years ago as, let’s say, Main Street Dental Care. Its website needs a simple update to the doctor’s photo and bio page to be perfectly good for Dr. Price’s immediate needs. The practice effectively has all of the necessary marketing assets already established in an easily transferable brand, and it’s easy to imagine how much more attractive Practice B appears to Dr. Price as a result.

Related reading: Top 5 signs you need a marketing consultant

	Once a dentist has made the decision to rebrand in preparation for eventual transition, choosing the new practice name isn’t always simple. Many factors should influence the decision, including location, type of care offered, patient base and the practice’s unique selling proposition.

	Along with a new name, a new branding scheme will need to be created, including professional logo design. Hiring a graphic designer to execute the rebranding process will ensure the new identity is contemporary, professional and visually impactful. Be diligent in choosing a trusted graphic design professional, ideally one with both branding and dental industry experience.

	Once complete, be diligent in implementing the new branding across all online (website, social media profiles and patient review sites) and offline (letterhead, signage, business cards, patient forms and promotional materials) platforms to create consistency for the new direction of the practice.

Hot read: If you had $10,000 to spend, what would you spend it on in your dental practice? Part 2 of 2

	There are a variety of myths about tax implications, particularly when it comes to issues around the name of a dental practice.

	One common belief, for example, is that a dentist must have a corporation to use a fictitious name. This is not the case in California, but dentists should check with their own state dental boards about these rules.

	Setting up a corporation simply for the purpose of using a fictitious name or DBA may actually create additional costs and compliance requirements the dentist may not want to bear. Many states impose a minimum tax or annual fee for the privilege of having the corporation. And a corporation’s books and records have to be kept separate and distinct from the owner (shareholder) because it is an entity all its own.

Part 1: What $10,000 could do for your practice

	Dentists often hear the pros and cons of an S corporation versus a C corporation, and it can be hard to determine which is the better option. The reality is that a corporation is a corporation, but if an “S election” has been filed, the corporation is treated as a pass-through entity, meaning income, losses, deductions and credits pass through to the shareholders and are taxed only at the individual level. This saves double taxation or paying the flat 35 percent income tax for personal service corporations plus tax on income at the individual level upon receipt by the shareholder(s).

	Corporate goodwill vs. personal goodwill

	Goodwill is defined as an intangible, salable asset arising from the reputation of a business owner (dentist) and the relationship with his or her customers distinct from the value of its stock and other tangible assets.

More from Naomi Cooper: What you need to know to make the ultimate dental lab website

	Goodwill is an asset that, upon purchase, a buyer can write off (amortize) throughout 15 years.  Upon its sale, goodwill is taxed as a capital gain as opposed to ordinary income-the difference in tax being almost half (20 percent for capital gains compared to up to 39.6 percent for ordinary income).

	Goodwill can be purchased or self-created. This is important when it comes time to sell the practice.  If Dr. Adams started her practice from scratch, all of her goodwill is self-created. Compare that to Dr. Barnes, who purchased her practice. Part of the original purchase price will have included goodwill. Why the distinction? Dr. Barnes deducted (amortized) her purchased goodwill throughout 15 years. Upon the sale of her practice, Dr. Barnes must “recapture” the amortization of that goodwill as ordinary income just as one does with depreciation on equipment.

	However, any allocation to goodwill upon the sale of Dr. Adams’ practice is taxed as capital gains as there was no amortization of Dr. Adams’ self-created goodwill along the way.

	When a dentist is incorporated, the sale of goodwill becomes even more complicated. Special care must be taken to allocate an appropriate amount of the goodwill being sold between the corporation and the individual. Much has been written on this subject, but, essentially, it comes down to the fact that a corporation can’t practice dentistry or have special skills like an individual dentist. A corporation can, however, own the latest dental equipment and technology, have a fantastic location or favorable premise lease and have an brand that resonates with the community and is carried through the entire patient experience.

Hot read: 4 ways to innovate your dental practice without breaking the bank

	So if a dentist sells his or her incorporated practice, there are normally two allocations for goodwill-one corporate and one personal. From a tax standpoint, we know capital gains tax is lower (about half) than ordinary income tax. Fortunately, gain from the sale of business assets is not subject to the 3.8 percent Medicare investment tax. Corporations do not have capital gains tax rates and personal service corporations only the flat 35 percent bracket. Thus, in theory, it makes sense to allocate as much goodwill as is reasonable to the individual doctor and not the corporation.  

	However, at the end of the day, the reality is that the value of goodwill is subjective. A dentist may obtain 10 appraisals of the practice with the result being 10 different valuations. And in the practice sale and transition industry that exists today, the allocation of the price of a practice is primarily a negotiation between buyer and seller over the most advantageous tax outcome for each party.

	One of the first steps a dentist should take when beginning to consider the process of retirement is to explore the value that both a dental marketing consultant and dental CPA can add. Both parties are uniquely qualified to help guide veteran dentists through one of the most important milestones, and one of the largest transactions, in their careers.

Related reading: 5 ways to boost your dental practice's patient referrals

When it comes to transition or retirement, dentists have several options.
They can sell their practices, find associates or simply throw their hands up and reduce office hours and production until they end up closing shop.

Goodwill hunting: Branding and tax implications

Ever since I started working with dentists in the early 1980s (and undoubtedly well before), there have been “megatrends” in dentistry, just as there are in any profession. In the early 1980s, a sampling of trends included:

 We were recovering from a recession, mired in extraordinary inflation, a monetary policy that saw Prime Rate hit 21.5%, double-digit unemployment, and an unprecedented number of bankruptcies.

The dental profession was in upheaval with the advent of changes to long-standing professional practices: proliferation of auxiliary staff performing procedures previously restricted to licensed dentists; denturism; dental service advertising; pre-paid dental plans, including PPOs and HMOs; and shopping center and franchise dentistry, to name a few.

With the AIDS epidemic came the need for new infection control protocols.

Fast forward to today. Surprisingly (or not) dentistry faces many of the same familiar themes. Just search the Internet for “Recession-Proof Your Dental Practice,” and you will see what I mean.

 There’s government regulation galore, and, of course, our most recent Great Recession still peering at us in the rearview mirror.

 Cost challenges remain, this time related to third-party reimbursements, staffing challenges, skyrocketing educational costs, and positioning one’s quality practice amidst ever-evolving alternative business models.

 Even as dentists must run their businesses, they face the additional hurdle of remaining leading edge in comprehensive diagnosis and treatment planning and the general delivery of great service and top dentistry.

The whole thing reminds me of our most recent presidential debate season. From Obama/Romney back to Kennedy/Nixon and onward through Clinton/Bush, it can be surreal how the same issues are forever resurfacing: the economy, high taxes, high unemployment, big government, and the need for “change” in Washington. It’s surreal.

So, yes, many of the concerns faced by the dental profession today are similar to those of decades past. At the same time, many have evolved and amplified even logarithmically. First, there’s been the dizzying advances in technology, where everything moves faster, for better and worse. In addition, we’ve been facing deeper economic peaks and valleys. Historically, dentistry has been fairly resilient during economic downturns, but consider that the average length of a recession since World War II was about 11 months. Under those averages, it was possible to tell yourself and your team, “How bad can it get?” That changed with The Great Recession which, depending on who you ask, lasted more than three times that average. It was a deal-changer for everyone, the dental profession included.

As a dental CPA, I feel particularly qualified to discuss financial and tax issues that are problematic for dentists. Let’s explore some of the biggest concerns that dentists face on these fronts today.

For new dentists, I think student debt is their biggest concern these days. I recently helped a new dentist figure out the best of a few options for repaying her private university and dental school student loans totaling $370,000!

I wonder if she can even comprehend the scope of that debt at her young age. Like our national debt of more than $16 trillion, it’s mind-boggling. For every $100,000 borrowed, the monthly payment is $716 (assuming a 6% interest rate and 20-year repayment term). Using a traditional repayment schedule versus an income-based plan, my young dentist would face payments of $2,650 per month. Given that student loan interest is not deductible for single taxpayers earning over $75,000 or married-filing-jointly couples earning over $155,000, she must earn 

 just to make her payments. That is $53,000 per year.

Even if my young dentist is below the deduction phase-out levels, the maximum amount of student loan interest she can deduct is $2,500 per year. Again at 6% over 20 years, the total interest on $370,000 is $266,190. These figures are so daunting it’s perhaps no surprise that young men and women considering dentistry today either put up a mental block on the numbers involved or choose a different profession.

Another significant problem facing many dentists is the Delta Dental reimbursement reductions we’re currently seeing across the country. The effects are far-reaching. Not only does it impact the cash flow of dental practices that participate in Delta Dental programs, but it is taking its toll on retiring dentists who are suddenly being asked to accept large price concessions depending on their degree of participation. Buyers will be forced to accept lower fees and to participate in Delta’s PPO plans. This could cause more senior dentists to work longer to “earn back” that price concession, much like many had to earn back their deflated retirement dollars after the stock market crash of 2008-2009. This information will work its way into the dental schools, where students may realize that their prospects after graduation are increasingly limited.

Another problem facing dentists and all small business owners are increased taxes. For single dentists earning over $200,000 and married-filing-jointly couples earning over $250,000, taxes have now kicked in from the Affordable Care Act (ObamaCare). They include the additional 0.90% High Income Hospital Insurance Tax and the 3.8% Medicare Investment Tax.

There are other ObamaCare taxes that are not tied to income, including:

Restrictions (contribution limits) on Flexible Spending Accounts and Health Savings Accounts

A Health Insurance Premium Tax and Excise Tax on Cadillac health plans

There’s also the little-known $2.00 per person/per year tax on all non-government health insurance policies to fund the “Patient-Centered Outcomes Research Institute” a nonprofit corporation which is neither an agency nor establishment of the United States government. The primary purpose of this institute is to provide education and information to patients, clinicians, purchasers and policy makers about health-care decisions.

Dentists should be especially mindful of the 2.6% Medical Device Excise Tax. Manufactures have no choice but to pass this cost along to dentists. Whether dentists will be able to successfully pass this tax through to their patients remains to be seen. This will be a big problem, since just about everything a dentist touches qualifies as a medical device. Additionally, for single dentists earning over $400,000 and married-filing-jointly couples earning over $450,000, the higher taxes under the American Taxpayer Relief and Accountability Act (ATRA) take effect. This means a top federal income tax rate of 39.6% plus the phase-out of personal exemptions and itemized deductions.

The notion of “Tax Freedom Day” may help put some of these numbers in context. This is the day every year by which Americans have paid all of their taxes. It’s an over-simplified proposition, since it takes all taxes due, and divides them by all taxpayers. Of course, some of us pay considerably more taxes than others. Still, it’s fun to contemplate the big picture it provides 

in the map, which displays Tax Freedom Day in each state

It’s important to remain informed about one’s challenges. That way, you can prepare for and make the best of them. At the same time, it’s important to not lose heart, particularly in your role within such a desirable and honorable profession. To quote the unflappable 

 curmudgeon Andy Rooney, “It’s just amazing how long this country has been going to hell without ever having got there.”

For my part, I am fortunate to be a member of the 

, whose Fall 2013 meeting happened in San Francisco in mid-November. Our purpose at this particular meeting was to discuss and learn as much as we can about the current state of affairs in dentistry, so we can continue to strengthen our ability to support our 6,000 or so dentist clients across the country. We heard from top people in organized dentistry plus industry leaders about the goings on at Delta Dental, the California Dental Association’s pending lawsuit against Delta, possible alternative business models for dentists, and methods to improve dental practices at all levels from proper procedure coding to optimizing hygiene departments, to overhead control and effective marketing strategies.

Thirty years ago, when I started working with dentists and heard the terms PPO and Franchise Dentistry, I ran around like Chicken Little. Today it is the same story, but the names have been changed to IPO and Management Service Organization (MSO). Plus, I’d like to think I’ve learned a thing or two over the years. While dentistry has significant challenges ahead, I believe that the profession is one of resilience and creativity. I, for one, have every confidence that, together, we’ll do what we must to make the necessary appropriate adjustments to remain the same desirable and honorable profession we’ve been all along.

New names and technology, but the challenges in dentistry are still the same

We wrap up our Paperless Series with a breakdown of the revenue-increasing and cost-reducing efficiencies of a paperless dental practice.

What a great series of articles about the benefits of operating a paperless dental practice. We covered a range of ideas from improving on in-office efficiencies, enhancing the patient experience, efficient implementation, and quality-of-life benefits. Let’s wrap up by taking a look at some of the numbers involved-those dollars in a hard-working dentist’s pocket.


	Let’s assume a typical dental practice scenario:

* 32 percent = 12% hygiene + 8% assistants + 8% office + 4% taxes & benefits

After consulting with experts and crunching the numbers with her Dental CPA, our good doctor decides to invest $150,000 to go paperless. She purchases digital radiography, outfits her operatories with computer terminals, incorporates patient education and communications programs, and establishes mobile computing and remote access to the office computer system. To keep things simple, we’ll deduct the technology costs over five years and assume a cash purchase.

Next, let’s look at plausible expected results, assuming relatively conservative revenue increases of 5% and 10%. We’ll also assume the fixed overhead grows by $6,000/year (increasing property taxes, service contracts, insurance premiums, etc.).

Referring to our initial scenario, a five percent increase in revenue equals $45,000. After backing out about 72% of the increase (in the form of employee compensation, variable supplies and lab costs and increased fixed costs), that leaves $32,250 in net income before depreciation. Subtract the non-cash depreciation deduction to arrive at taxable net income, and then subtract 40% in taxes. The resulting, after-tax cash flow is $220,350 (versus $189,000 in our “before” view). That’s a take-home pay increase of $31,350 (see Table 1). A 10% revenue increase equals $90,000. After applying all of the same calculations, our doctor’s take-home pay is increased by $54,300 (see Table 2).

Paperless Practice with 5% Increase in Revenue 

Paperless Practice with 10% Increase in Revenue 


	In short, with a modest technology investment, a conservatively estimated 5%–10% revenue increase can become a 17%–29% uptick in take-home pay for our good doctor. Talk about a nice “bonus.” Can you spell 401(k)?

And this is with a relatively one-dimensional illustration, assuming the doctor generates the entire revenue increase with no help from hygiene. If we leave the payroll at 32% of revenue, or assume hygiene salaries go up proportionately with revenue, the doctor’s take-home pay still goes up 12% with the $45,000 revenue increase, or 20% with the $90,000 increase.

One could argue the assistant and office salaries remain constant and that those percentages go down with the increased revenue, thereby offsetting the increase in hygiene salaries. Regardless, we have seen that a paperless practice is greener; can create revenue-increasing and cost-reducing efficiencies in several areas; fosters a better patient experience and new patient referrals; and contributes to an enjoyable, vital dental practice for doctor and staff alike.


	Last but not least, let’s consider the day you’re ready to sell your practice. A modern, efficient dental practice with happy staff is attractive to prospective buyers. This tilts the supply/demand lead to other negotiation advantages.

Learn about the financial benefits of a paperless practice 

A more profitable practice also renders a higher sale price. While part of the value of a dental practice is derived from revenue, the profit available for a buyer has a much greater impact. I try to avoid rules of thumb because, by definition, they don’t universally apply. But for simplicity’s sake, if a practice sells for 65% of revenue, a $45,000 increase in revenue can add $29,250 to the sale price. Accordingly, a $90,000 increase in revenue can add $58,500 more at escrow closing.

Another, less well-known ratio is sale price as a percentage of profit. For this, I typically see a range of 1.5–2.0 times profit. If you factor in this ratio, the paperless practice in Table 1 could sell for $40,000–$50,000 more than the pre-paperless version; the practice in Table 2 could sell for $80,000–$100,000 more. While these increased sales prices don’t recapture the full investment of $150,000 for going paperless, you don’t have to factor in too many years of expected increased profits and tax savings to exceed it.

For my money, the benefits of a paperless office outweigh the cost in current and future dollars. Perhaps even more important, they weigh heavily in favor of a valuable intangible that money alone can’t buy: improved quality of life for the doctor, staff and patients.

Put more money back into your pocket by going paperless

	As we get closer to the end of the year, dentists often ask about how major technology purchases will impact their taxes. Applications such as lasers, CAD/CAM restoration systems, digital and cone beam radiology are large investments, and dentists who work closely with their CPAs can strategize to maximize the tax benefits of purchasing them.

	First, let’s look at Section 179; that magic amount of write-off we all want to understand. Section 179 of the Internal Revenue Code specifies the amount of equipment one may elect to expense in a given year. The number has changed a lot with various economic stimulus packages. In 2010, we may expense up to $134,000. In 2011, though, unless Congress makes a change, the amount will drop to $25,000.

	If a dentist spends exactly $134,000 on equipment in 2010, he or she may expense the entire amount under Section 179 (see Table 1). Dentists making that same purchase in 2011 will be able to expense only $25,000 under Section 179 with the remainder of $109,000 spread over 5 years (it’s actually 6 but who’s counting?) (see Table 2). This might not be a bad thing, however, because tax rates are going up in 2011 (see the 

	Depreciation is a non-cash expense that lowers one’s income for tax purposes, theoretically helping save for the replacement of equipment as it becomes obsolete or wears out. We look at two methods of depreciation, called conventions; these are the Mid-Year and Mid-Quarter Conventions.

	Suppose your dental specific CPA advises you to spread the depreciation over 5 years instead of electing Section 179. Why do this? If you finance the equipment, you may want the 5-year deduction to offset the cost of paying back the loan, which is done with after-tax dollars. By aligning the depreciation deduction with the repayment of principal, you can avoid the pain of paying tax on income you don’t really have. This is a significant problem dentists should consider very carefully with their tax advisors.

	The typical scenario for depreciating equipment over time calls for the Mid-Year Convention. See Table 3 for an illustration of this method using different dollar amounts and the related tax savings. Oftentimes, dentists learn that they are going to have a large tax billand make significant equipment purchases toward the end of the year to offset it. Be careful! If you purchase more than 40% of your total equipment for the year in the 4th quarter, you must use the Mid-Quarter Convention, which renders a much smaller first year deduction (see Table 4). Of course, you can elect Section 179 to increase your first year deduction. As you can see from Tables 3 and 4, the depreciation amounts are different each year. Dentists may make an election on their tax returns to use the Straight Line method of depreciation, which renders the same deduction each year, making budgeting a little easier.

	If you sell or trade-in an asset that has been depreciated, you likely will have a taxable event. Let’s say you want to upgrade your CAD/CAM restoration system’s milling unit. Before you begin depreciating the new unit, you are required to recapture the depreciation taken on the old one. Simply stated, that prior depreciation now becomes ordinary income taxed at your highest rate. The proper technique is to do an exchange for tax purposes, whereby the old milling unit is replaced with the new one and only the difference in cost between the two is depreciated.

	Whether dentists use Section 179, Mid-Year, Mid-Quarter or Straight Line depreciation, the total deduction is the same. The only difference is timing. Dentists should plan carefully with their CPA to ensure they receive the maximum benefit from their depreciation deductions based on anticipated income, tax rates and future purchases.

 As we get closer to the end of the year, dentists often ask about how major technology purchases will impact their taxes. Applications such as lasers, CAD/CAM restoration systems, digital and cone beam radiology are large investments, and dentists who work closely with their CPAs can strategize to maximize the tax benefits of purchasing them.  Capitalizing on Section 179

Dental technology and taxes

	As I write, Massachusetts is sending a Republican Senator to Washington, D.C. for the first time since Edward Brooke served from 1967–1979. What’s this got to do with tax-law changes? A lot! Without making any political commentary, the facts are:

		U.S. Senator Scott Brown is considered a real threat to President Obama’s health care reform bill. He says on his Web site, “I believe that all Americans deserve health care coverage, but I am opposed to the health care legislation that is under consideration in Congress and will vote against it.”

		If the proposed health care reform legislation is enacted, there are significant tax increases that would impact most dentists.

	We don’t know how, or whether, the Massachusetts election will affect the outcome, but it is probably safe to say the debate will go on for a while longer. And this creates an uncertain environment for tax code in 2010 and beyond.

	Remember that ancient proverb, “May you live in interesting times?” When it comes to U.S. tax codes, 2010–2011 is one of those “interesting” periods in which the old becomes new again, and the new is hauntingly familiar.

	You would think tax law changes enacted well into a calendar year would only affect future years. But since 1917, Congress has passed 14 laws with retroactive tax increases.

	We don’t know what Congress will do in the coming months or how it might affect our 2010 taxes, but one thing is virtually certain: Your taxes are going up in 2011. This is because the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) is coming to an end this year. This law had brought sweeping changes to the tax code:

		It lowered the top income tax bracket of 39.6 % to 35 % as well as lowering all the other brackets.

		It introduced dozens of tax cuts that were phased in over the 10-year period.

	Now, just as we got used to the changes, EGTRRA is expiring. The law was designed for this limited 10-year period, after which everything reverts to the way it was in 2001. This year (2010) is the last year for EGTRRA, so it will give us the lowest taxes in the 10-year window as well as for several years prior. While we have had numerous tax bills since 2001, including Bush and Obama stimulus packages, starting in 2011, most of the tax law in effect in 2001 is reborn.

	Let’s begin with 2010 tax considerations that can play in our favor.

		Phase-Outs: In 2010 we are no longer subject to certain “phase-outs” or take-aways that increase our taxes. They have come down gradually since 2001 and include limiting or taking away our personal exemptions ($3,650 per eligible dependent in 2010) and itemized deductions by limiting them to amounts above 3% of Adjusted Gross Income.

		Estate Taxes/Gifts: Unless Congress enacts retroactive changes, there is no estate tax in 2010, and you may gift up to $13,000 to any individual without filing a gift tax return.

		Depreciation/Expensing: While Section 179 expensing has dropped from its 2009 amount of $250,000, we still have a healthy $134,000 in 2010.

		IRA/Roth IRA Conversions: For more on this opportunity, see DPR January 2010.

		Social Security Wage Base (SSWB): For the year 2010, the SSWB is unchanged at $106,800. The SSWB has risen every year since 2000, 3.45% per year on average, so it’s refreshing to see no change this year. As in 2009, we continue to pay 6.2 % of wages up to the wage base ($6,621.60) or 12.4 % for independent contractors and self-employed dentists ($13,243.20).

		Retirement Planning: In 2010 the contribution limits for 401(k) and similar plans like 403(b)s are unchanged. You may defer $16,500 of wages into these plans ($22,000 if you are older than 50).

		Mileage deduction rates go down: Business miles are deductible at 50 cents per mile (down from 55 cents in 2009); Charitable miles are deductible at 14 cents per mile (unchanged); If you are on the road to recovery, medical travel is deductible at 16.5 cents per mile (down from 24 cents in 2009).

		Bonus depreciation goes away: Bonus depreciation of 50% of qualified business expenditures expired at the end of 2009.

		Non-itemized real-estate tax deductions: In 2009, homeowners who did not itemize deductions were able to deduct their real estate taxes in addition to their standard deduction. They could deduct up to $500 (or up to $1,000 if married filing jointly). This primarily benefited taxpayers who had paid off their mortgage but still paid property tax on their home. This is gone in 2010.

		College tuition deductions: The deduction for up to $4,000 of college tuition and fees expired after 2009.

		IRA charitable donations: Beginning in 2010, IRA owners aged 70 ½ will lose the opportunity to directly donate part of their IRA to charity.

		Child tax credit: The child tax credit of $1,000 reverts to $500 after 2010.

		Long-term capital gains rates: The tax rate reduction for long-term capital gains and dividends is scheduled to expire in 2010. In 2011, the maximum long-term capital gains tax rate reverts to 20% from 15%.

		AMT exemptions: We were given some relief from the Alternative Minimum Tax in 2009 with a temporary patch that set AMT exemption amounts at $70,950 for married filing jointly; $46,700 for single and head-of-household; and $35,475 for married filing separate. We are uncertain about 2010.

	Now, more than ever, your CPA/financial advisor should be your best friend, even if he or she must sometimes be the bearer of bad news. With all the changes in 2009 and depending on the planning and tax-savings opportunities you’ve engaged in so far, you may be happily or unhappily surprised by what you discover upon completion of your tax returns. Either way, carpe diem on future planning. Just as you would prefer seeing your patients regularly for preventive care well before more invasive treatment becomes necessary, your CPA/financial advisor can be of best use to you if you are in regular touch.

	By specializing in full-circle levels of service for dentists, Capital Performance Advisors can expertly address your professional, financial and wealth aspirations through seamless applications of personal and institutional wealth management, as well as tax, estate and retirement planning. Visit cpacapital.com for more information.

 As I write, Massachusetts is sending a Republican Senator to Washington, D.C. for the first time since Edward Brooke served from 1967–1979. What’s this got to do with tax-law changes? A lot! Without making any political commentary, the facts are:

Tax changes for 2010

	It’s 2010, and it’s official. With the advent of the new year, we also face an intriguing new tax-planning option, one that offers us both opportunities and challenges, especially during 2010–2112. It’s the arrival of new IRA-to-Roth-IRA conversion rules. Now that they’re here, it’s worth taking a bit of time from the bench to consider what they mean to you, your wealth, and your retirement and estate planning needs.


	There are a variety of reasons you may decide to convert your traditional IRAs to Roth IRAs, which have two major advantages over traditional IRAs:

	First, Roth IRA distributions are tax-free if they are qualified distributions. To be qualified, they must be made after a five-year holding period has passed and after the accountholder reaches age 59½.

	Second, Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to traditional IRAs. Therefore, a Roth IRA accountholder who reaches age 70½ does not need to begin taking distributions; instead, the funds can continue to grow tax free until they are needed or are passed to heirs.

	The tax-free nature of Roth IRA distributions may help you avoid higher tax brackets that would otherwise apply if you were withdrawing distributions from a traditional IRA. Moreover, these distributions-unlike those from traditional IRAs-do not affect the calculation of tax owed on Social Security payments.

	You should consider an IRA-to-Roth-IRA conversion if any of the following apply to you:

 It’s 2010, and it’s official. With the advent of the new year, we also face an intriguing new tax-planning option, one that offers us both opportunities and challenges, especially during 2010–2112. It’s the arrival of new IRA-to-Roth-IRA conversion rules. Now that they’re here, it’s worth taking a bit of time from the bench to consider what they mean to you, your wealth, and your retirement and estate planning needs.