A quarterly newsletter dedicated to keeping dental practices informed
Baker Tilly is a founding member of the Academy of Dental CPAs (ADCPA), a group dedicated to helping dental professionals meet their accounting, tax and advisory needs. Through our industry-specific experience and expertise, we proactively address tax matters that affect you and your practice by developing tax planning strategies to minimize tax challenges and maximize tax savings.
Although there have been few changes in the areas of meals and entertainment, hiring family members as employees and the business usage of automobiles, questions often arise in regard to tax deductibility and how to maximize tax planning opportunities. In this issue of the Dental Bite newsletter, we discuss key points on each of these matters as they relate to dental practices.
Meals and entertainment
Meals and entertainment expenses which are ordinary and necessary business expenses are generally only 50 percent deductible for income tax reporting purposes; however, there are several situations in which the meals and entertainment expenses are fully deductible. Expenses incurred in the following common circumstances qualify as 100 percent deductible for tax purposes:
- Meals that qualify as a de minimis fringe benefit; these meals (and snacks) include meals offered on-site at the company’s office, for the employer’s convenience for more than 50 percent of employees
- Items made available for the general public
- Company picnics or holiday parties
- Employee recognition expenses
- Career development meeting expenses
- Expenses treated as taxable income to an employee
Read more about meals and entertainment deductions.
Family members as employees
Many practices employ spouses, children or other family members to assist in office and administrative tasks. If you employ your child who is under the age of 18 and are an owner of a sole proprietorship or partnership, the child’s wages are not subject to Social Security or Medicare taxes (both employee and employer shares). In addition, wages earned by a child under age 21 are not subject to the Federal Unemployment Tax Act (FUTA). These provisions do not apply to spouses. Wages earned are subject to income taxes, but a child can utilize the standard deduction to offset their first $6,350 of income in 2017, essentially making these wages tax free to your child.
For example, a business owner in the 35 percent tax bracket hires his 14-year-old son to work in the office on weekends to help with filing, shredding, cleaning, etc. The child earns $6,000 in wages throughout the year and has no other earnings/income. Ideally, the child should receive a Form W-2 for the work performed. Since the full amount of the wages will be deductible as compensation paid by the business, the tax savings to the business owner is $2,100 ($6,000 x 35 percent) and the income tax to the child is $0 since all of these wages are offset by the child’s standard deduction. In addition, if the business income is subject to self-employment tax, there would be additional tax savings by way of reduced self-employment income.
Even if the wages exceed the standard deduction, the child is allowed to make an IRA contribution up to $5,500 in 2017 which as an “above-the-line” deduction could substantially reduce the child's taxable income. If the maximum traditional IRA contribution is made, the first $11,850 of the child's taxable wages will result in no income tax liability ($6,350 standard deduction + $5,500 IRA deduction). And assuming the parents’ 35 percent income tax bracket, the child's wages would produce an income tax savings of $4,130 to them. Alternatively, the child may consider paying some tax and making a Roth IRA contribution.
When hiring your children, you need to be careful to treat them similarly to any other employee. This might include items such as:
- Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
- Issuing paychecks as you would a normal employee (e.g., biweekly)
- Documenting that the services are legitimate and considered ordinary and necessary for the business
- Ensuring the services provided do not include typical household chores
Business use of automobiles
New vehicle purchases which exceed 6,000 pounds in gross vehicle weight (GVW) are eligible to expense 50 percent of the cost if the vehicle is placed in service prior to Dec. 31, 2017. In addition to bonus depreciation, you may claim up to $25,000 in section 179 depreciation expenses on new or used vehicles during the year the vehicle is placed in service.
Passenger automobile depreciation limits are not to exceed $11,160 in the year a passenger auto is first placed in service and depreciation limits are reduced annually thereafter.
Personal use of a company vehicle, including commuting expenses, must be added to an employees’ W-2 at year-end. The amount to be added to the W-2 as taxable income is based on miles driven and the type of vehicle driven.
Practices which do not own a vehicle(s) may reimburse the owners (and employees) at a standard mileage rate of up to 53.5 cents per mile. These reimbursements are not taxable to an employee and are fully deductible by the practice. Commuting expenses are not deductible nor reimbursable. The IRS requires contemporaneous records to claim business expenses related to an automobile including a mileage log and service/fuel receipts among other items.
Advantages of using a specialized dental industry CPA
A dental industry CPA can help your practice perform optimally by identifying opportunities to increase profitability and efficiency. Specifically, our industry experts utilize dashboard software designed for dental practices to extract your practice’s data and develop benchmarks and key performance indicators. The dashboard ties into your practice management software for visibility into trends on a number of key ratios and factors. For more information on this subject, read Utilizing technology to maximize your dental practice’s performance.
Are you getting dental-specific data and feedback from your CPA? Contact any of our dental practice specialists if you have any questions about this article or other tax or management questions.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.