What Do You Do With Extra Cash in Your Dental Practice?

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No doubt, the title to this article will evoke some groans and rolled eyes. What extra cash, you say? With student loans ranging from $350,000-$400,000, dental practice purchase costs ranging from $600,000-$800,000, home mortgages, supporting a family, and tax obligations, that “extra cash” may never seem to materialize. And before you know it, you’ve reached retirement age with a dental practice that doesn’t command top dollar upon sale and a projected income stream that won’t support a comfortable retirement.

Fund Your Golden Years
Fortunately, your story can have a happy ending. With a bit of planning, you have the means to fund your “golden years” by investing appropriately in your dental practice by using the right saving vehicles for retirement and leveraging the tax code to your advantage.

Invest in Your Practice
When purchasing a dental practice, prospective buyers look for a strong, sustainable client base, a healthy balance sheet, and a skilled team who keeps the practice operating at peak efficiency. They’re also looking for a well-maintained facility with up-to-date dental practice equipment and technology. Recent changes to the tax code can help you keep your building and equipment in tip-top shape and provide payoffs now and in the future.
Accelerate Deductions

If you own the real estate in which you house your practice, you may have an opportunity to accelerate deductions on your income taxes. Instead of applying the standard 39-year depreciation schedule to the entire property, Section 168 of the tax code empowers a building engineer to perform a cost segregation study that breaks the building into Internal Revenue Service (IRS) sanctioned asset classes.
Selected components may be deemed to have shorter useful lives (i.e., 5, 7, or 15 years), thereby opening the door to accelerated depreciation. For “ground up” dental buildings, we have seen 24-65 percent of the total building cost reallocated from 39-year property to much shorter lives.

That adjustment alone can have a significant impact on your current tax liability. If you completed a new building or major lease-hold improvement within the past several years, do not despair. Filing an additional tax form allows you to move the cash flow benefits of a cost segregation study to your current tax year.

Upgrading Your Equipment or Adding an Operatory Can Be Beneficial
If you need to upgrade your dental equipment or add an operatory, but worry that it’s beyond your financial reach, Section 179 of the IRS tax code may tip the decision in a favorable direction. For equipment purchased and placed in service, your business may claim a Section 179 deduction up to $500,000, subject to a phase-out threshold of $2,000,000 on total purchases. You may also claim a 50 percent bonus depreciation on qualified property placed in service this year.

Industry Benchmarks
The table below provides industry benchmarks for staffing, patient load, and annual billing based on the number of operatories in your dental practice. As indicated, modest growth in capacity can translate into an attractive revenue stream.

Average Dental Practices 3-4 Ops 4-6 Ops 6-9 Ops
Dentists 1 1 or 2 2 to 3
Hygienists 1.5 2 2 to 3
Active Patients 1,000-1,800 1,900-2,500 2,800-7,500
Annual Billing $750,000 to $1,00,000 $900,000 to $1,500,000 $1,400,000 to $3,000,000

You may also wish to consider expansions in your service offerings. For example, an investment in chairside CAD/CAM solution, which would enable you to design, produce, and insert ceramic restorations in a single appointment.

Beyond the obvious revenue potential and cost savings, patients benefit by eliminating extra trips to your office to complete their treatments. Convenience may draw people to your doorstep. A quick look at results from four practices attests to the upside potential.

Technology-Minded Doctor Increased Net Income 50 Percent
For the chart below, there is a “story” regarding Practice C, with a four percent decrease in collections. The practice was a partnership. One of the partners was older and wanted to “hibernate” until he retired, versus keeping his practice on the cutting edge of technology and providing world-class treatment for his patients. So the two partners basically divorced, causing the slight drop in collections. However, when the technology-minded doctor went off on his own, his net income increased 50 percent, as evidenced in the table below.

Before & After Purchase of CEREC & 3D Imaging
NET COLLECTIONS
Practice Before Purchase After Purchase % Increase
A $1,295,000 $1,663,000 28%
B $982,000 $1,882,000 92%
C $3,204,000 $3,076,000 -4%
D $1,990,000 $2,593,000 30%
Before & After Purchase of CEREC & 3D Imaging
NET INCOME
Practice Before Purchase After Purchase % Increase
A $476,000 $850,000 79%
B $266,000 $465,000 75%
C $520,000 $780,000 50%
D $598,000 $908,000 52%

American Dental Association (ADA) surveys tell us less than 10 percent of dentists have the ability to retire when they desire and maintain the same standard of living. According to the Wall Street Journal, “70 is the new 65” for dentists. The average age at which dentists retire is 68.7… and rising.”

Maybe we are all living longer, so why not keep working? Maybe dentists really love their jobs. But just maybe, they have too much debt and too little savings as they enter their 60s.

Invest in Your Retirement
IRAs: As soon as practical, make contributions to a tax-qualified retirement plan. Annual investments in Individual Retirement Accounts (IRAs) can grow into a comfortable nest egg by the time you transition into retirement. Contributions to traditional IRAs may reduce your current tax obligations as a function of your adjusted gross income.

Roth IRAs: Taxes apply to future withdrawals when you are likely to have a lower marginal tax rate. Roth IRA contributions are not eligible for tax deductions; however, these assets will not be taxed as they generate earnings or otherwise increase in value. Your tax advisor can help select an investment vehicle suitable for your circumstances.

401 (k) Plans: Contributions to 401(k) plans also provide tax benefits. For example, a 50+-year-old dentist with the right 401(k) Profit Sharing Plan can set aside $59,000 for retirement. If married to a 50+-year-old, another $24,000 can be placed into a 401(k) or Simple IRA. If paying a combined federal and state marginal tax rate of 40 percent, the after-tax cost of these savings amounts to $49,800.

While the eventual withdrawals from these accounts will have tax implications, you may be in a lower tax bracket when they’re realized.

After-Tax Investment Strategy
Retirement accounts are not the only form of recommended savings. As the dental practice matures and the debt load eases, you should develop an after-tax investment strategy funded by resources that are not required to meet current obligations. A skilled wealth advisor can help you craft an investment strategy that is consistent with your age, risk tolerance, and preferences.

Invest in Tax Planning
The good news about going into dentistry is its skilled professionals are highly compensated. The bad news is they often land in the highest tax brackets. Moreover, high income individuals are subject to elevated taxation on their federal returns as a function of:
• A top tax rate of 20% for capital gains and dividends, up from 15%
• A phase-out of the $4,000 personal exemption deduction
• Limits on itemized deductions, such as home mortgage interest, charitable contributions, property taxes, sales tax, state taxes
• Increases in the employee portion of the FICA hospital insurance tax (i.e., 0.9% on wages that exceed $250,000)
• A 3.8% Medicare tax on investment income (e.g., interest, dividends, annuities, royalties, rents)

If you’d like to create some “extra cash,” you’ll want to understand your impending tax liabilities and develop strategies that consistently keep you in the lowest marginal tax brackets year after year. The tax strategies noted earlier may merit your consideration; however, their value depends on how well they fit your specific circumstances. Clearly, it does not make sense to create a windfall of tax savings in one year if your liabilities soar in subsequent years as a result. Likewise, you won’t get much benefit from accelerating deductions should you have a year with relatively light income.

50 Percent of Dentists Don’t Get Max Benefit From Retirement Plans
Your tax advisor should also take a close look at your retirement plans. While 96 percent of dentists have a practice-sponsored plan, half do not get the maximum benefit from them. If you find yourself having to play “catch up” on your retirement planning later in your career, there are special cash balance retirement plans that could allow you to contribute significantly more than traditional plans, including the possibility of contributing some proceeds from the sale of your practice.

Just as fluctuations in your year-to-year business results call for adjustments in tax strategy, your retirement plan may need to change several times during the life of your practice. Key decision points include:
• Cash flow of the practice
• Dentist’s debt load
• Years to retirement
• Retirement funding needs
• Income tax savings
• Future building projects
• Employee demographics
• Team appreciation

A periodic review gives you the means to stash away more funds (or free up cash to spend on something else) when you make investments strategically, not on auto-pilot.

Invest in Your Future
If extra cash threatens to burn a hole in your pocket while significantly increasing your tax obligations, it’s time to create a written plan that charts the course for your future. Capture the goals for your practice as well as your personal life and then devise the strategies and tactics for achieving them. When you write down goals and track them, you are much more likely to achieve them. And when you have extra cash, you’ll know what to do with it.

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