November 3rd, 2020
This year has been unlike any other in recent memory. Front and center, COVID-19 has touched virtually every aspect of daily living and business activity in 2020. In addition to other financial consequences, the resulting fallout is likely to have a significant impact on year-end tax planning for both individuals and closely held businesses, such as dental practices! We reached out to our friends at Honkamp Krueger for general tips and guidelines to provide to you while preparing for your dental practice’s 2020 taxes.
According to Honkamp Krueger, now is the time to paint your overall tax picture for 2020. By developing a year-end plan, you can maximize the tax breaks currently on the books and avoid potential pitfalls. In response to the pandemic, Congress authorized economic stimulus payments and favorable business loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act also features significant changes relating to income and payroll taxes. This new law follows close on the heels of the massive Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA revised whole sections of the tax code and included notable provisions for both individuals and businesses.
Please note, the following year-end tax planning tips provided by Honkamp Krueger intend to be only a general overview of year-end tax planning. They recommend that you review both your personal and practice situation with a financial representative to help you implement the strategies appropriately.
#1 – Maximize the 20% qualified business income (QBI) tax deduction available for business activities. Dental practices and their self-rented real estate are included in the specified service trade or business (SSTB) category. As such, the income limitations apply (ending at $213,200 for single and $426,600 for married filing jointly).
#2 – Utilize section 179 immediate depreciation write-off for dental equipment, office furniture, computer equipment, etc. purchased by your practice. If you made improvements to your practice facility, you could utilize the 100% bonus depreciation for qualifying expenses. If you bought or built your building you could use a cost segregation study to identify those costs that qualify for accelerated depreciation.
#3 – Maximize your 401(k)-retirement plan by contributing $19,500 from your paycheck, $26,000 if you are age 50 or older. Capitalize on the match and profit share provisions that are available through this type of plan.
#4 – Reduce your 3.8% net investment income tax (NIIT) by keeping your modified adjusted gross income (MAGI) under $200,000 ($250,000 for joint filers). Investment in municipal bonds, which doesn’t count as NIIT is another way to reduce the amount of income subject to the NIIT. You can also contribute funds that you won’t need into ROTH IRAs to take advantage of tax-free growth and a more aggressive investment strategy, if appropriate for you.
#5 – Take advantage of deferring capital gains by using a Qualified Opportunity Zone (QOZ) or a 1031 tax-free exchange for the sale of real estate held for business/investment purposes.
#6 – If you have children that are 19 or older, potentially shift income from your high tax rate to their lower rate by transferring ownership of the practice real estate or dental equipment into a family limited partnership (FLP) in which they have some ownership. Make sure the FLP charges the practice the highest reasonable rent possible.
#7 – For those that are charitably inclined and itemize your deductions, donate appreciated property, such as stocks, instead of cash to your favorite qualified charity. You get a charitable deduction for the fair market value of the appreciated property if it has been held for 12 months and you don’t have to pick up the appreciation as a taxable gain. Another way to avoid this gain and benefit multiple charities is to set up a donor-advised fund through a community foundation. You get the charitable deduction at the time of the gift and make distributions to the charitable organizations later. Remember, the annual limit was raised to 100% of adjusted gross income (AGI) for 2020 and there is a $300 ($600 for a married couple) above-the-line deduction for monetary contributions made that even non-itemizers can utilize.
#8 – Several tax credits are still available or newly available for 2020 including the Disabled Access Tax Credit for building improvements to make your facility more accessible, Solar Tax Credit for the installation of solar energy-producing systems, and the credits available through the Families First Coronavirus Response Act (FFCRA) amongst others.
#9 – With a Section 529 college savings plan (529 plan), you can set up an account for a child’s college education that grows without any current tax erosion. Distributions used to pay for qualified expenses are exempt from tax. Beginning in 2018, the TCJA expanded the use of 529 plans for tuition payments of up to $10,000 a year for a child’s kindergarten, elementary, or secondary school education.
10 – Investigate Paycheck Protection Program (PPP) forgiveness. Under the CARES Act, PPP loans may be fully or partially forgiven. As of the writing of this letter, the expenses used in the forgiveness calculation are not deductible for tax purposes. If that remains the case, you should be able to delay the reduction of those expenses into 2021 by waiting to complete the loan forgiveness process until after December 31, 2020. Despite recent guidance, this remains a complex procedure and is constantly changing, so Honkamp Krueger recommends consulting with your professional tax advisor about the details.
This year-end tax planning letter is based on the prevailing federal tax laws, rules, and regulations. It is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year. Please remember, this letter intends to serve only as a general guideline. Your dental practice circumstances will likely require careful examination. Honkamp Krueger would be glad to schedule a meeting with you to assist with all your tax planning needs for both your personal life and dental business.
Honkamp Krueger is offering a complimentary Brush Up Review. Their professionals take an initial look at key elements of your dental practice to help close the gaps in business planning and crucial compliance issues that could affect your practice and your bottom line.
For further assistance or to take advantage of the complimentary Brush Up Review, contact Adam Reisch at [email protected] or Ron Stallman at [email protected] or call 888-556-0123.
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