Dental Financial Wellbeing

Are you a dentist just out of dental school with a practice to run and you’re not prepared for the business aspects? You might be making financial mistakes every day and not even know it. You could have major financial problems coming your way and won’t know it until it’s too late.

Across the country dentists are struggling. The percentage of dentists who describe themselves as “not busy enough” is increasing all because of a growing supply of working dentists and shrinking demand. If you find yourself with more time than patients, you could be in trouble. With dental care among adults decreasing and the continuing changes in dental insurance, it’s harder and more important than ever to get control of your finances.

Financial decisions – For some dentists, every financial decision causes panic, even the routine ones. If you don’t have sufficient cash flow, you won’t have the money to confidently spend on the things you need to grow your practice. Some of this can come from poor management of overhead. As a percentage of your revenue, you should be running your practice at about 55% to 60% overhead. Anything higher than 60% can mean you are heading for disaster.

Debt – If you’re afraid of debt, this can only make the problem worse. When you try to pay cash for everything, it means you don’t have cash things that come up, and this puts you in a position where your problems feed one another and send your finances into oblivion.

Retirement – Poor cash flow also leads to poor long-term savings, which can delay and dramatically reduce the quality of your retirement. If your money is sunk into overhead costs and tax bills, you won’t be able to adequately save for retirement. To maintain your current lifestyle after retirement, you need to manage your money intelligently today.

Are you spending more time managing your practice than seeing patients? If so, you need help, before it’s too late. Seek financial guidance now, and get your practice back on track.

Maximize Equipment Tax Deductions

Your practice doesn’t have to settle for depreciating equipment over several years. With the “Section 179” deduction, you can generally elect to deduct machinery and equipment in one year.

The maximum Section 179 allowance for 2013 (and 2012) is $500,000, unless Congress acts to change the amount.

For many dental practices, this is one of the best tax breaks available today, yet many fail to take full advantage of it. Let’s say you spend $125,000 on equipment this year. How do your options look?

With the Section 179 election: You can write off the entire $125,000 in one year, rather than depreciating it over several years. This includes dental equipment, machines, computers, copiers, fax machines, telephone systems and office furniture.

Without Section 179: Money spent to purchase business equipment is treated as a capital expense and may have to be recovered over a period of years through depreciation or amortization.

In order to qualify for the tax break, you must use the equipment more than 50 percent of the time for business. (If you use it for personal purposes too, you must maintain records and can write off only the business-related percentage.)

There are a number of other restrictions: For example, for 2013, if the cost of all qualifying acquisitions exceeds $2 million during one year, the deduction is reduced on a dollar-for-dollar basis (unchanged from 2012).

In addition, the amount you write off for Section 179 can’t exceed the taxable income from your business. That may be a problem for C corporations if the business zeroes out its income by paying everything in salaries because there won’t be enough income to cover the Section 179 election.

It might be better if the corporation pays less compensation and keeps enough taxable income to cover a Section 179 election. You can also carry over any excess to future years if you run up against the income limitation.

What if your C corporation operates at a loss this year but expects to turn a profit next year? You might be better off not taking the expense this year and carrying it forward, rather than depreciating equipment purchased this year over several years.

With some careful timing, you can fully utilize the tax break this year. Look around your practice toward year-end and buy any equipment you need.

As long as you “place it in service” by December 31, you can deduct the equipment with Section 179. You can even pay for it next year on credit and still write it off on this year’s tax return.

Tip: Some dentists are involved in more than one venture. In the case of pass-through entities (partnerships, LLCs, and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. (IRS Regulation 1.179-2) Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Consult your tax adviser for details.

Plan Today to Qualify for Tomorrow’s Practice Loans

Wherever you are on the path of your dental career, you are likely to need financing to start a practice, expand it or purchase new equipment.

Fortunately, lenders generally consider dentists to be good credit risks and lending policies for them don’t change much with the ebb and flow of the economy. There has been some tightening for loans of more than $1 million, but overall, lending to dentists is “business as usual” unless the applicant has marginal credit.

One area where lenders are more cautious these days, however, is when it comes to handing out money to buy cosmetic dentistry practices. Loans are still available, but it may be hard to get full financing due to a downturn in that specialty in some areas.

Providing Collateral

One typical prerequisite for any dental-practice loan is taking out life and disability insurance policies as collateral. That’s because without you, there is no practice and no income to pay off the debt.

Policies adequate to cover the full loan are key to getting money, particularly for new dentists, who often need 100 percent financing, plus a line of credit, to open the doors. The approval process goes faster if you have the insurance in place before asking for a loan, along with collateral assignment authorization forms from your insurer.

The proceeds from life insurance will pay off your loan and any remaining balance will go to your other beneficiaries. Whole life policies have an additional advantage. Because they have cash value, they can be used as a source of emergency funds with no approval needed.

Disability insurance lets you pay your bills until you can get back to work. There is also a specific type of coverage called business reducing term disability insurance. If you were to become totally disabled, the policy would provide a benefit sufficient to cover the monthly loan payments during the remaining term of the debt.

Other Factors to Consider

Lenders may make other demands before approving a practice loan, especially if you are just starting out.

You need a business plan with projected cash flows for the next few years. This shows lenders that you have done your homework and lets them determine that you will likely have the resources to repay the loan. A well-structured business plan takes time to put together, but it will serve as a guide to making informed business decisions. It also provides metrics that help you, and your lenders, track progress toward your goals.

If you need money to build or renovate an office, lenders generally want a detailed project plan that includes realistic estimates of all costs plus a contingency budget to cover unexpected expenses.

Finally, lenders typically want you to have a group of advisors who specialize in the field of dentistry. A solid team will include your accountant, attorney and insurance broker. If your loan involves renovations or construction, you will also need a general contractor.

The support of these professionals helps assure your lenders that you are serious about building a successful practice and have access to individuals with professional experience.