Thinking About Hiring Your Children In Your Dental Practice?

Generally they will be in a lower tax bracket than you. Therefore, you can shift income from your higher tax bracket to your children’s lower tax rates.

In order to qualify as a deductible business expense, there are four criteria that must be met.

1. The compensation must be shown as an ordinary and necessary expense connected with the practice.
2. The pay must be reasonable, defined as the amount normally paid for similar services.
3. The services must actually be provided.
4. The compensation must be paid.

Your child is eligible to contribute up to $5,000 to an individual retirement account (IRA). Thus, in 2014, your child can earn $11,200 without paying any Federal income tax if they contribute the full $5,000 to an IRA.

They could also decide to contribute up to $5,000 to a Roth IRA. They would then pay about $500 of federal income tax, but all the qualified distributions from the Roth IRA would be then tax-free.

Long-Term Borrowing

Are you considering long-term corporate borrowings later in 2013 or 2014? If so, you might want to close on the financing before legislation could be introduced that would potentially reduce corporate interest expense, allowing you to benefit from any possible grandfathering of the interest expense deduction.

In order to affect “revenue neutral” corporate tax reform, as called for by both the President and the House Ways and Means Chairman, the highest marginal corporate tax rate of 35% would be reduced and some corporate tax expenditures may be reduced or eliminated. Interest expense is one of the leading corporate tax deductions. If revenue neutral corporate tax reform is enacted, corporate interest deductions may be reduced.

Historically, the tax treatment of taxpayers who have already incurred expenses, has been grandfathered by Congress and those expenses have been allowed. Therefore, if you are considering long-term borrowing, sooner may be better than later in order take advantage of current tax benefits.

Transitioning a Dental Practice

Transitioning into a dental practice as a young doctor, or transitioning out as a seasoned practitioner is extremely stressful due to the inherent financial and professional significance. The anxiety related to these transactions can be reduced by proper planning, setting professional and economic goals and educating oneself about what is involved in the transition process.

The first step preparing for an exit strategy is to objectively focus on an accurate valuation of the practice. Obtaining an appraisal early on will allow a potential seller to compare the practice with similar practices involved in transitions and provide recommendations to enhance the desirability of the practice and how best to structure the financing for the proposed transition and ongoing operations.

The majority of a practice’s value comes from the ability to generate a long-term income stream to a buyer, commonly known as goodwill. Goodwill can include active current patients, referring dentists plus the value of the staff members who remain after the transition. Knowing the goodwill of a practice for both seller and buyer, is critical to determining the value and in obtaining financing for the transaction.

The parties need to determine if it should be an equity sale or an asset sale. The proper allocation of the purchase price could save the buyer or seller a significant amount of money in taxes. There are important legal considerations and implications between these two types of transactions.

Dentists desiring to transition in or out of a practice need to prepare a plan with a team of expert advisors who can identify and understand the contractual matters and operational issues associated with the transition and avoid potential operation, financial, legal and tax mistakes. Skillful planning is critical to ensure the buyer purchases a stable, long-term practice and the seller is provided adequate consideration.