Tax Planning for Dentists: 5 Actionable Tips from James Moore

While you’re caring for patients and building your practice, it’s possible your tax strategy might be quietly draining your profits. Many dental practice owners unknowingly overpay thousands in taxes each year simply by missing key opportunities for savings.

Operating a dental practice presents specific tax planning opportunities that other businesses don’t have access to. From optimizing your business structure to maximizing your retirement contributions, these strategies can significantly reduce your tax burden while strengthening your practice’s financial foundation.

At James Moore, we’ve helped numerous dental practices transform their approach to managing taxes. We encourage clients to take a proactive approach that accounts for the unique challenges they face, whether it’s managing high overhead costs, dealing with unpredictable cash flow or making strategic equipment investments.

We’ve outlined five powerful tax planning strategies specifically tailored to dental practices. These aren’t complex theoretical concepts; they’re straightforward steps that can help you keep more of what you earn and position your practice for long-term success. Whether you’re a new practice owner or have been serving patients for decades, implementing these strategies can make a meaningful difference to your bottom line.

Tax Tip 1: Choose the Right Business Structure

The foundation of effective tax planning for dentists begins with choosing the optimal business structure for your practice. This is important for liability reasons, but your choice of business entity also has a major impact on your tax strategy (and therefore, the money you take home at the end of each year).

Many dental practices are structured as limited liability companies (LLCs), or professional LLCs (PLLCs) if required by the state they operate in. This approach provides liability safeguards and also offers much flexibility from a tax perspective.

If your practice has multiple partners, it’ll be taxed as a partnership by default. However, electing for your LLC to be taxed as an S corporation can help save significantly on self-employment taxes. S corporation owners pay themselves a reasonable salary and take additional profits as distributions, which are not subject to self-employment taxes. The S corporation structure also allows you to benefit from preferred tax rates for long-term capital gains when you sell equipment or your practice.

Established practices might have external investment or complex ownership structures, or want to aggressively reinvest their profits into growth. For those practices, a C corporation might be a better approach. You might also opt for a multi-entity structure that includes separate entities for real estate holdings or ownership of equipment. There’s no one correct answer. The right choice depends on your specific situation, practice size and long-term goals — making it important to work with qualified tax professionals.

As your practice evolves, your optimal business structure may change. Tax regulations evolve too, which is why regular reviews with your tax professional are crucial in ensuring you’re not missing valuable tax-saving opportunities.

Tax Tip 2: Maximize Retirement Plan Contributions

One of the most powerful tax-saving strategies for dental practice owners is maximizing retirement plan contributions. Beyond securing your financial future, the right retirement plan can significantly reduce your current tax burden.

As the owner of a dental practice, you have access to several retirement plan options, each with different contribution limits and tax benefits. Standard options like SIMPLE IRAs and 401(k) plans offer good starting points, but more sophisticated plans may provide greater tax advantages if you have significant amounts of excess income you’d like to use to invest in your future.

For high-earning dental practices, consider options like:

• 401(k) plans with profit-sharing components
• Defined benefit plans, which can allow far higher annual contributions
• Cash balance plans, offering higher contribution limits than traditional 401(k)s

The tax benefits are substantial; contributions reduce your taxable income dollar for dollar and allow your funds to grow tax deferred. For many dental professionals, this can mean tens of thousands in immediate tax savings. You’ll pay taxes on these funds when you withdraw them in your retirement. But that would typically be at a lower rate, since your income will likely be lower in your retirement than in your peak income-earning years.

When selecting a retirement plan, assess not just your current situation but your long-term goals. The right plan serves both as a tax reduction strategy today and a wealth-building vehicle for tomorrow. At James Moore, we can help determine which retirement plan structure maximizes your tax benefits while supporting your long-term financial objectives.

Tax Tip 3: Strategic Equipment Purchases

Smart timing of equipment purchasing can significantly impact your dental practice’s tax liability. Section 179 deductions allow you to deduct the full cost of qualifying equipment in the year of purchase, rather than depreciating it over many years.

For dental practices, this creates a powerful opportunity to upgrade technology, replace aging equipment or expand service offerings while reducing your tax burden. Equipment like digital imaging systems, furniture and even practice management software can qualify for these accelerated deductions.

The key is strategic timing. Purchasing equipment near year-end can provide immediate tax benefits against your current year income. But if business is trending upward and you expect to have a stronger year next year, it may be worth waiting.

There are also the cash flow realities associated with investing in new equipment. Financing equipment has the potential of creating deductions without expending cash.  While this can help manage cash flow, make sure your practice can handle the payments comfortably.

Work with your dental CPA to evaluate not just the tax implications but the overall return on investment for potential equipment purchases. The ideal strategy aligns practice improvement with tax planning to create both short-term tax advantages and sustainable long-term practice growth.

Tax Tip 4: Optimize Your Accounting Method

Most small to mid-sized dental practices operate on a cash-basis accounting method, creating significant tax planning opportunities through strategic timing of income and expenses. Unlike accrual accounting, cash-basis accounting means you recognize revenue when payment is received and expenses when they’re paid (not when they’re incurred).

This timing flexibility allows for year-end tax planning strategies that can substantially reduce your tax liability. Consider accelerating expenses by paying bills in December rather than January, purchasing supplies in bulk before year-end, or pre-paying certain expenses where permissible under tax law.

Similarly, you might defer income by delaying certain billing activities or insurance claim submissions until January. These strategies can shift income from the current tax year to the next, potentially reducing your current tax burden.

The key is maintaining a proactive approach with regular financial reviews throughout the year. This allows you to estimate your tax situation well before year-end and implement these timing strategies effectively. Larger practices may be required to use accrual-based accounting for financial reporting purposes, particularly if they have obligations to investors or lenders. But they can still use cash-based accounting for tax purposes as long as they qualify.

Tax Tip 5: Take Advantage of Qualified Business Income (QBI) Deduction

The Tax Cuts and Jobs Act introduced a significant tax benefit for business owners: the Qualified Business Income (QBI) deduction. This provision allows eligible dental practice owners to deduct up to 20% of their qualified business income from their taxable income.

For many dental practice owners, this translates to substantial tax savings. However, maximizing this deduction requires careful planning, especially if your taxable income exceeds certain thresholds. The rules surrounding QBI can be complex. Dental practices are considered a specified service trade or business (SSTB) by the IRS, which means eligibility phases out once your income exceeds certain thresholds.

The full deduction is available if taxable income is under $191,950 for single filers (or $383,000 for married filing jointly filers) and then begins to phase out. Income above $241,950 for single filers and $483,900 for joint filers does not qualify for the QBI deduction.

For high-earning dental practice owners, strategic tax planning can help preserve this valuable deduction. Options include:

• Increasing retirement plan contributions to reduce taxable income
• Timing income and deductions to stay under income thresholds
• Reviewing compensation structures for practice owners

Working with a dental CPA who understands these nuances is crucial for maximizing this deduction while maintaining compliance with IRS regulations.

James Moore: Expert Dental Tax Professionals

Tax planning for dentists isn’t just about compliance; it’s about creating opportunities for growth and financial success. The strategies we’ve outlined can help you significantly reduce your tax burden while positioning your practice for long-term prosperity.

Effective tax planning is a year-round process, not a last-minute scramble. By working proactively with financial professionals who understand the unique challenges and opportunities of dental practices, you can develop a comprehensive strategy that addresses both immediate tax savings and long-term financial goals.

At James Moore, we specialize in helping dental professionals navigate the complexities of tax planning. Our team of dental CPAs has extensive experience navigating the specific financial needs of dental practices. We go beyond standard accounting services to provide strategic guidance that helps you keep more of what you earn.

Don’t let tax planning be an afterthought in your practice management. Contact James Moore today to schedule a consultation and discover how we can help transform your practice’s financial health.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.