8.6.10 Issue #439 Forward This Newsletter To A Colleague

Ken Rubin
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Should My Dental Practice Be Incorporated?
By Ken Rubin, CPA, PFS

Many factors go into determining whether or not you should operate your dental practice as a corporation. If the right factors are present, it could be a very wise decision for you to incorporate. Most dentists tell me “it’s no longer advantageous to be incorporated.” They feel this way mainly because of three changes that occurred back in the 1980’s:

  • Corporate tax rates were raised and are no longer dramatically lower than individual tax rates
  • Corporate retirement plan contribution limits were dropped so they are no longer significantly higher than for other plans
  • Some state taxes have increased (e.g. in California the annual corporate minimum tax of $200 was increased to $800 per year)

These changes make incorporating no longer as beneficial as it used to be.  However, it still may be very beneficial for you to be a corporation and many factors need to be considered. 

Limited Liability
You cannot try to hide behind a corporate veil for protection from professional malpractice. This means if you make a mistake while performing dentistry, being incorporated won’t help. However, you will be able to shelter your personal assets from most business-related lawsuits and liabilities if you incorporate. For example, if one of your employees is driving negligently (talking on a cell phone, texting, putting on make-up, speeding, etc.) while running an office errand and kills someone, all of your personal assets are at risk if you’re not incorporated.  Given today’s litigious society, asset protection strategies are essential. An attorney recently informed me that, although our country only makes up 5% of the world’s population, we are involved in 90% of the world’s lawsuits!

These last two factors cannot be quantified in terms of dollar amounts. However, the potential benefits from either one of these could easily greatly outweigh the costs of incorporating your practice. As always, I recommend you seek competent professional assistance to help you make the proper decision given your particular set of circumstances.

Medical Insurance
If you’re not incorporated, generally you can only deduct 60% of your family’s medical insurance. However, incorporated dentists may deduct the other 40%.

Reduced IRS Audit Risk
Most dentists (and even many CPA’s) don’t realize how incorporating will dramatically reduce your audit risk. Suppose your practice collections are $400,000 per year and you’re operating as a sole proprietorship. At the IRS, your tax return goes into the same pool for audit selection as all the other sole proprietorships. The vast majority of sole proprietorships (filing a schedule “C” on their 1040 form) are small part-time and full-time businesses like flower stands, hair dressers, consultants, etc. Naturally, you’ll stick out like a big target for audit selection in this pool. But if you incorporate, you’ll get thrown into a different pool: with Microsoft, Ford, Exxon, AT&T, etc. In this pool, you’ll be such a small target you’ll hardly be noticed.

IRS audits can be extremely expensive and stressful, even if the final end result is no increase in taxes. Several years ago I represented (and successfully defended) about 30 dentists across the nation that were being audited by the IRS for claiming a tax credit (better than a deduction) for their intra-oral camera purchases. Guess what - none of the dentists being audited were incorporated!

Other Corporate Fringe Benefits
“C” Corporations can establish a medical expense reimbursement plan to pay medical bills not covered by medical insurance. Group term and split dollar life insurance also is available. “C” Corporations are less popular nowadays because of the extra planning involved to avoid the annual double tax, and the potential double tax upon practice sale.

Payroll Tax Savings
Alternatively, it may be beneficial to operate your practice as an “S” Corporation, and generate thousands of dollars every year by reducing your self-employment and owner’s payroll taxes, by setting a minimal IRS, but acceptable and reasonable salary for yourself. The IRS has been very seriously threatening to close this loophole for a long time. They came closer than ever in 2010, but the proposed regulation was not passed.

In analyzing whether to be a dental corporation today, many factors must be addressed - and as always be sure to seek competent professional help. 

Ken Rubin is the President and CEO of Ken Rubin & Company, Dental CPA's - www.kenrubincpa.com. Ken can be reached at Ken@kenrubincpa.com

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