Tax Planning - Post 08 - Why Dentists Overpay 30K
Why Dentists Overpay $30,000 in Taxes (Even With a Good CPA)
Meta Description: Most dental practice owners overpay taxes by $20,000-$40,000 annually—despite having a CPA. Here's why it happens and the specific strategies that fix it.
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Cross-links: Is Your CPA Planning or Filing?, Section 179 vs Bonus Depreciation, 10K Tax Guarantee
A Texas dentist came to me last year. Great practice—$1.8M in production, 40% overhead, healthy profits.
He had a CPA he'd used for 12 years. Trusted relationship. Never had problems.
But in our 14-day analysis, I found $34,000 in annual tax savings he was leaving on the table.
His CPA wasn't incompetent. The returns were accurate. Nothing illegal was happening.
The problem? His CPA was filing, not planning.
Here's what we found—and what you might be missing too.
The Five Areas Where Dentists Lose Money
1. Entity Structure ($8,000 - $25,000/year)
Most dental practices start as sole proprietorships or simple LLCs. That made sense at $300K in revenue.
But at $1M+? You're likely paying unnecessary self-employment tax.
The problem: Every dollar of profit is subject to 15.3% self-employment tax on top of regular income tax.
The solution: S-Corp election.
With S-Corp treatment, you pay yourself a reasonable salary (subject to payroll tax) and take the rest as distributions (not subject to self-employment tax).
Example:
Dr. Smith's practice nets $400,000 annually.
Without S-Corp (LLC/Sole Prop):
Self-employment tax: $400,000 × 15.3% = $61,200
Plus income tax
With S-Corp (salary of $180,000, distributions of $220,000):
Payroll tax: $180,000 × 15.3% = $27,540
Distribution tax: $0
Annual savings: $33,660
This is the single biggest miss I see in dental practices.
2. Associate Compensation Structure ($5,000 - $15,000/year)
If you have associates, how you structure their compensation matters enormously.
The typical approach: Pay associates a percentage of production (25-35%) as regular W-2 wages.
The problem: Simple W-2 wages mean the practice pays employer payroll taxes on the full amount, and there's no alignment of incentives.
Smarter structures:
Option A: Production-Based Bonus
Base salary + quarterly production bonus
Bonuses can be structured more favorably
Defers some compensation to year-end
Option B: Profit-Sharing
If you have a 401(k) with profit sharing, associates benefit too
Their contributions reduce taxable income
You get a deduction for employer contributions
Option C: Path-to-Partnership
If an associate is a future partner, structure compensation to transition to ownership
Buy-ins can be tax-advantaged
Aligns long-term incentives
The right structure depends on your practice, but the default (straight W-2 percentage) is rarely optimal.
3. Retirement Vehicle Optimization ($10,000 - $50,000/year)
This is where the biggest dollars are.
Most dentists have a 401(k) or SEP-IRA. They max it out. They think they're done.
They're not.
Standard 401(k) maximum: ~$23,000/year employee + ~$46,000 employer = ~$69,000 total
With a defined benefit plan: You can potentially defer $100,000 - $275,000+ per year depending on age and income.
Example:
Dr. Jones is 52, earns $500,000, has a 401(k) maxed at $69,000.
We add a cash balance defined benefit plan.
New total retirement contribution: $190,000/year
Additional deduction: $121,000
Tax savings at 37% bracket: $44,770/year
Why most dentists miss this:
Their CPA doesn't specialize in retirement planning
Defined benefit plans are "complicated" (they're not, with the right advisor)
Nobody tells them it's an option
If you're over 45, earning $300K+, and not in a defined benefit plan, you're almost certainly overpaying taxes.
4. Equipment Depreciation ($5,000 - $20,000/year)
Dental equipment is expensive. CBCT machines, CAD/CAM systems, chairs—practices often invest $100,000+ in a single year.
The problem: Many CPAs default to standard 5-7 year depreciation.
The opportunity: Section 179 and Bonus Depreciation can let you deduct the full cost in Year 1.
Example:
You buy a $120,000 CBCT machine.
Standard depreciation (7 years):
Year 1 deduction: ~$17,000
Tax savings: ~$6,300
Section 179 (full deduction):
Year 1 deduction: $120,000
Tax savings: ~$44,400
Difference: $38,100 more cash this year.
Same machine. Same price. Just different tax treatment.
And timing matters. Buy in December? Full deduction this year. Buy in January? Wait 12 months.
5. Commonly Missed Deductions ($3,000 - $8,000/year)
Beyond the big structural items, there are deductions many dental practices miss:
Continuing education:
Courses, conferences, travel to dental events
Specialty training and certifications
Professional memberships:
ADA, state dental associations
Specialty societies
Study clubs
Supplies and equipment:
Scrubs and clinical clothing
Small equipment (handpieces, curing lights)
Office supplies
Marketing:
Website, SEO, advertising
Patient communication systems
Practice management software
Practice management:
Consulting fees
Coaching and mentorship
Practice management courses
What gets missed: Expenses paid personally, cash transactions without receipts, expenses on personal credit cards that aren't tracked.
The Real Problem: Filing vs. Planning
Here's the uncomfortable truth about most dental CPAs:
They're excellent at filing. They're not doing planning.
Filing = looking at what happened last year and reporting it correctly.
Planning = looking at what's coming and structuring it strategically.
Your CPA probably:
Files accurate returns
Answers your questions
Meets deadlines
Your CPA probably doesn't:
Call you with proactive strategy recommendations
Meet with you in September to plan year-end moves
Suggest entity restructuring when your income changes
Recommend retirement vehicles beyond basic 401(k)
This isn't because they're bad at their job. It's because their business model is built around filing as many returns as efficiently as possible.
Proactive planning requires fewer clients, deeper relationships, and year-round attention. Most CPA firms aren't set up for that.
The 5-Minute Dental Practice Tax Audit
Here's a quick self-assessment. Answer honestly:
1. Entity Structure
My practice is an S-Corp (or LLC taxed as S-Corp)
I've reviewed my entity structure in the last 2 years
My salary/distribution split has been analyzed for optimization
If you checked fewer than 2: Likely opportunity in entity structure
2. Associate Compensation
I've evaluated compensation structures beyond straight W-2 wages
Compensation is aligned with practice profitability
We've discussed tax implications of associate structure
If you have associates and checked fewer than 2: Likely opportunity in compensation
3. Retirement Optimization
I'm maxing out my current retirement vehicle
I know the maximum I could contribute (not just what I am contributing)
I've explored defined benefit/cash balance plans
If you're over 45 with $300K+ income and checked fewer than 2: Significant opportunity
4. Depreciation Strategy
Recent equipment purchases were discussed BEFORE buying
We use Section 179 and/or Bonus Depreciation strategically
I know why my depreciation method was chosen
If you've bought equipment recently and checked fewer than 2: Likely missed opportunity
5. Deduction Capture
All CE expenses are tracked and deducted
Professional memberships are fully captured
I have a system for capturing expenses throughout the year
If you checked fewer than 2: Likely leaving money on the table
Scoring:
12-15 checks: You may be well-optimized
8-11 checks: There's room for improvement
Under 8 checks: High likelihood of significant overpayment
What $34,000 in Savings Actually Looked Like
Let me break down what I found for that Texas dentist:
Category
Annual Savings
S-Corp restructure (was LLC)
$15,000
Defined benefit plan added
$12,000
Equipment depreciation accelerated
$7,000
Total
$34,000
His CPA was good. His CPA just wasn't doing this analysis.
After our engagement, he kept his same CPA for filing. We do the planning. They work together.
That's often the right setup. You don't have to fire your CPA. You just need someone thinking strategically.
📥 DOWNLOAD: Dental Practice Tax Self-Audit
The complete version of the 5-question audit above, expanded to:
15 diagnostic questions across 5 categories
Scoring system to estimate what you're leaving on the table
Action items for each category
Questions to ask your current CPA
Red flags that suggest you need a second opinion
[Download the Dental Practice Tax Self-Audit (PDF) →]
The Guarantee
I've analyzed hundreds of dental practices. I've never found one that couldn't save at least $10,000.
That's why I guarantee it.
$10,000+ in tax savings within 14 days—or I pay you.
Here's how it works:
A 15-minute call to confirm you're a good fit
You send us your last 2 returns and current financials
I personally analyze the five areas above
Within 14 days, I show you exactly what I found
If I can't find $10,000 in annual savings, I pay you for your time.
[Book Your 14-Day Analysis →]
I've never had to pay out. I don't expect to start now.
—Tom Woolley, Today CFO
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