Tax Reform: An Overview for Dentists
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. Most of the tax reform became effective on January 1, 2018 and will remain for 7 years before reverting to the old law. The following discussion is an incomplete summary of the changes that affect dentists, and you’re advised to discuss with your CPA.
Decreased Tax Rates
Individual tax rates have been reduced by roughly 1-3%, and the tax brackets have been expanded. The highest tax rate is lower and it takes more income to get to that point. The result is that everyone will take advantage of these lower tax rates.
C-Corp owners will enjoy the new 21% flat rate corporate tax, reduced from the previous 35% and now permanent. Most dental practices will continue to benefit from the S-Corp structure, and all owners should seek professional advice before considering a change to their legal entity.
Changes to Standard & Itemized Deductions
While the standard deduction has been roughly doubled, the personal exemptions ($4,050 per family member in 2017) have been eliminated. For taxpayer’s previously subject to the Alternative Minimum Tax (AMT), the loss of the personal exemption will not be much of a detriment.
State and local taxes (SALT) were previously fully-allowed as an itemized deduction but will now be capped at $10,000. This includes your property taxes, states taxes, and DMV fees all combined. For taxpayer’s previously subject to the AMT, this may not be quite as bad as it seems, since your deduction was previously limited due to AMT.
The mortgage interest deduction on new home purchases is limited to the first $750,000, and “miscellaneous itemized deductions” (e.g. union fees, tax preparation fees) have been eliminated. However, the income-based itemized deduction limitation has also been eliminated, so higher-income filers could potentially deduct a much greater amount of charitable contributions, for example, without the limitation that existed previously.
Child & Dependent Credits
The Child Tax Credit used to be $1,000 per child, and began phasing-out at income of only $110,000 for joint taxpayers. The new credit is $2,000 per child and the phase-out doesn’t begin until income is above $400,000 for joint taxpayers. Additionally, there’s a new $500 “family credit” for dependents age 17 and older.
Alternative Minimum Tax (AMT) Changes
The AMT was introduced in 1982 as a means to ensure a minimum level of taxation for taxpayers falling within a range of higher income. A taxpayer arrives at their ordinary income tax after reducing their taxable income by all allowable deductions. However, a secondary calculation is required in which many allowable deductions (e.g. property taxes) are added back to taxable income to determine the “tentative minimum tax”. If the regular tax is less than the tentative minimum tax, a difference is shown as AMT on the tax return. The intent was to ensure that taxpayers with lots of deductions pay something. Unfortunately, the AMT wasn’t indexed for inflation, so the percentage of taxpayers subject to the additional tax increased well beyond the original intention.
The recent tax reform significantly increases the exemption amounts included in the AMT calculation, and ensures they’ll be indexed for inflation going forward. The overall result is that fewer taxpayers will find themselves subject to AMT, and those still subject to AMT will likely pay less beginning in 2018.
Previous to the reform, 50% of both business meals (e.g. taking a business contact to dinner) and business entertainment (e.g. taking a supplier to a sporting event) were deductible by the business. Beginning in 2018, business meals continue to be 50% deductible, but the deduction for entertainment is no longer allowed.
Depreciation & Section 179
Under the previous tax law, a business could deduct an extra 50% of certain depreciable property in the first year as “bonus depreciation”. For the next 7 years, 100% of eligible property can be expensed in the first year. Additionally, used equipment can now qualify for the 100% “bonus depreciation”.
Previously, Section 179 allowed the first-year expensing of up to $500,000 of equipment and other assets. While the newly-increased “bonus depreciation” essentially matches this benefit, Section 179 has been increased to $1 million per year.
CEREC & New 20% Deduction
Previously, revenue from CEREC machines was used to factor the Domestic Production Activities Deduction (DPAD) under Section 199. The tax reform repealed Section 199 and therefore eliminated the 9% deduction from DPAD effective 2018.
Section 199A is a new, 20% deduction provided on the net income from pass-through businesses including S-Corps, sole proprietorships, partnerships. The deduction can start to be reduced for joint filers with taxable income above $315,000, and another article discusses this in greater detail.
Dave Sholer, CPA, MBA works exclusively with dentists in California, offering full-service accounting & tax solutions for dental practices of all sizes.
Want more info? Dave offers a no-cost, zero obligation consultation to answer whatever questions you have and/or to review your books, tax returns, and payroll situation.