This past December, President Trump signed the Tax Cuts and Jobs Act into law, initiating the biggest overhaul to the U.S. tax code in almost 30 years. This is not an all-encompassing review of tax reform but covers certain key items that could impact you and your dental practice. In general, many of the items related to businesses are permanent changes to tax law, where the individual tax law changes often only apply from 2018 to 2025.
You should consult with your tax professional to determine how you can best take advantage of these tax law changes.
At a very high level, the most significant changes included:
- Lower top rates for individuals
- Millions more Americans will take standard deduction
- Lower top rate for businesses (C corp)
- New deduction for pass-through businesses (S corp and partnership)
Reviewing Your Entity Structure
This is one action that every dental practice should take. Because of changes made to the top tax rate for C corporations, along with new deductions for S corporations, now is the time for every dental practice to revisit their entity structure.
These 2018 provisions allow for a deduction for 20 percent of qualified pass-through business income, subject to certain exclusions, limitations and phase-outs. Many S corp practices will qualify for this deduction, but high producing practices will likely phase out of any benefit.
In recent years, the majority of dental practices were established initially as LLCs (Limited Liability Corporations) and then converted to S corps when the timing was beneficial from a tax perspective. With the drop in the C corp tax rate from 35 percent to 21 percent, an S corp may not always make sense.
The best entity structure can only be determined with an in-depth analysis conducted by a tax professional, as there are many practice-specific variables that come into play (e.g. profitability, income growth expectations and succession planning).
Additional Business Tax Changes
For tax years beginning after December 31, 2017, the Domestic Production Activities Deduction (DPAD) is repealed. If your practice milled crowns chairside and you utilized this deduction to receive a tax write-off, 2017 will be the last tax year you can receive the deduction.
This well-known deduction, allowing a practice to depreciate the cost of new equipment in the first year, has been increased from $500,000 to $1 million for total annual asset purchases.
Individual Income Tax Reform
Income Tax Brackets
The highest tax bracket has been reduced from 39.6 percent to 37 percent. Historically, the married-filing-separately status would be subject to higher tax brackets than the single filing status, but under the new law, the marriage penalty only remains for those in the top tax brackets.
This was a change to simplify filings for most taxpayers. It’s estimated that about 120 million tax returns will be impacted. By almost doubling the standard deduction, itemizing will not be beneficial to many taxpayers.
- State and local taxes: The deduction for state income, sales and property taxes have been capped in the aggregate to be $10,000 as an itemized deduction. This is a significant change for individuals living in high-tax states.
- Mortgage interest: For home acquisition debt incurred after December 15, 2017, the deductible portion of interest is limited to $750,000 of indebtedness for married-filing-jointly.
The deduction for alimony payments is repealed alongside the receipt of alimony as part of gross income for divorce or separation instruments executed after December 31, 2018.
Estate and Gift Tax
The estate and gift tax exclusion has been temporarily increased from $5,000,000 to $10,000,000, with indexing for inflation. This increase applies to decedents dying and gifts made after December 31, 2017, and before January 1, 2026.
The recent tax code changes will impact everyone, from both a business and personal tax perspective. Meet with your tax professional now to ensure that you are strategizing what will provide you with the maximum benefit.