{"id":8468,"date":"2018-12-06T11:47:45","date_gmt":"2018-12-06T17:47:45","guid":{"rendered":"https:\/\/digitalblogs.wpengine.com\/?p=8468"},"modified":"2019-09-30T18:53:35","modified_gmt":"2019-09-30T23:53:35","slug":"leveraging-efficiencies-to-minimize-tax-liability","status":"publish","type":"post","link":"https:\/\/www.cainwatters.com\/digitalblogs\/leveraging-efficiencies-to-minimize-tax-liability\/","title":{"rendered":"Leveraging Efficiencies to Minimize Tax Liability"},"content":{"rendered":"<p>When the Tax Cuts and Jobs Act passed at the end of 2017, CPAs hurried to understand the most comprehensive tax update in the United States since the late \u201880s. Throughout the year, regulations have been issued by the IRS providing supplemental guidance, and many strategies are becoming clearer after addressing the new law with our clients in 2018.<\/p>\n<p>One of the most impactful aspects of the new provisions for our dental clients is Section 199A regarding qualified business income (QBI). In review, income from partnerships, limited liability companies (LLCs), S corporations, trusts, estates and sole proprietorships may qualify for a 20% deduction of qualified business profits.<\/p>\n<p>At first this sounds exciting, however income derived from a \u201cspecified service trade or business\u201d (SSTB) may not automatically qualify for the 20% deduction. Dentists and other similar healthcare professionals who provide services directly to a patient are specifically listed in the law and regulations as a SSTB. In fact, these businesses are subject to income limitations that can reduce and even <em>eliminate<\/em> the deduction.<\/p>\n<p>A large majority of our clients fall within the \u201cservice business\u201d category and while the additional limitations have added some complexity to the QBI, it still presents opportunities to our tax planning process.<\/p>\n<p>In simplest form, here is a breakdown of the income limitations for those married taxpayers in the \u201cservice\u201d business:<\/p>\n<table style=\"height: 238px;\" width=\"617\">\n<tbody>\n<tr>\n<td width=\"125\"><strong><u>Taxable Income<\/u><\/strong><\/td>\n<td width=\"125\"><strong><u>Deduction of QBI<\/u><\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"125\">Under $315,000<\/td>\n<td width=\"125\">20%<\/td>\n<\/tr>\n<tr>\n<td width=\"125\">$315,000 &#8211; $415,000<\/td>\n<td width=\"125\">Reduced below 20%<\/td>\n<\/tr>\n<tr>\n<td width=\"125\">Over $415,000<\/td>\n<td width=\"125\">Zero<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>As seen in our annual <span style=\"text-decoration: underline; color: #0000ff;\"><a style=\"color: #0000ff;\" href=\"https:\/\/www.cainwatters.com\/hdydpc\"><em>How Does Your Dental Practice Compare<\/em><\/a><\/span><em>? <\/em>Report, most of our dental practices net between $400,000 \u2013 $1,000,000 before non-operating and doctor costs, such as doctor wages, perks, continuing education and retirement savings.<\/p>\n<p>For clients on the lower end of this spectrum, qualifying for the QBI deduction should not be an issue, but for those on the higher end, a multifaceted strategy is required to reduce the taxable income within range, ideally below the $315,000 threshold, to take full advantage of the deduction.<\/p>\n<p>Our goal with every client is tax <em>efficiency<\/em>. As a business owner, this simply means taking advantage of <em>all<\/em> appropriate deductions in the business to reduce taxable income and resulting tax liability as much as possible. For a majority of our clients, the new QBI deduction creates an additional opportunity to make them even more efficient<em>.<\/em><\/p>\n<h4><strong>CASE STUDY<\/strong><\/h4>\n<p>For an example of tax efficiency in action, let\u2019s take a look at a new client that walked into the office last year. She is in her late 30s, practicing for about eight years and owns a one-doctor pediatric practice in the Midwest.<\/p>\n<p>She came in with a thriving practice on pace to collect $1.9 million, netting almost 50% before non-operating and doctor costs. She was doing a lot of things right, yet even with a great practice, the client was frustrated. When she looked at her annual tax liability, she felt like her hard work was not properly being rewarded and as a result, making little progress towards her family\u2019s long-term financial goals.<\/p>\n<p>As we looked deeper, it was clear why. Very little tax and retirement planning had produced inefficient results. Based on our calculations, if the client kept the status quo for 2018 her tax liability would be $228,000 federal and $39,000 state, with only $26,500 saved towards retirement for the year.<\/p>\n<p>It was time to make a change. The goal was to reduce her taxable income by reallocating the dollars to a place where they would work for, rather than against her. The first thing we did was maximize her retirement plan contributions to $108,000. She was currently only saving 26% of her income, which was too low for her to meet long term goals.<\/p>\n<p>She had some equipment she was looking to buy, but with her current situation she had been putting it off. It was advised that investing in capital assets and improvements would actually allow for immediate deductions up to $1 million. Not only would she be able to get the new equipment her practice needed, but this purchase would help her work toward our goal of lowering her taxable income.<\/p>\n<p>Next we looked more closely at employee salaries. The doctor\u2019s husband was helping out in the practice doing social media marketing, and she was not paying him. By adding him to the payroll it allowed him to contribute to the 401(k) plan, and also continue to get us to her goal.<\/p>\n<p>She had a high-deductible health insurance plan but she was not contributing to a health savings account. Adding this helped her taxable income go down by another $7,000.<\/p>\n<p>As we continued to work through her finances, liabilities continued to decrease. There were some other key expenses that she should have included in the business, and she elected to participate in a conservation easement which brought deductions that continued to get us closer to the QBI income threshold.<\/p>\n<p>Overall, the tax liability was reduced to $51,000 federal and $16,000 state \u2013 approximately $200,000 lower than originally projected, and her annual retirement savings was increased by $108,000.<\/p>\n<p>Every client is unique, and not every client will be able to achieve the same results, but it is more important than ever to have proper planning to minimize your tax exposure and maximize your savings potential. Check out <span style=\"text-decoration: underline; color: #0000ff;\"><a style=\"color: #0000ff; text-decoration: underline;\" href=\"https:\/\/www.cainwatters.com\/2018-end-of-year-tax-strategies\/\">more of our end-of-year tax strategies<\/a>,<\/span> or discuss your individual situation, <span style=\"text-decoration: underline;\"><span style=\"color: #0000ff;\"><a style=\"color: #0000ff; text-decoration: underline;\" href=\"https:\/\/www.cainwatters.com\/contact\">contact CWA today.<\/a><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When the Tax Cuts and Jobs Act passed at the end of 2017, CPAs hurried to understand the most comprehensive tax update in the United States since the late \u201880s. Throughout the year, regulations have been issued by the IRS providing supplemental guidance, and many strategies are becoming clearer after addressing the new law with [&hellip;]<\/p>\n","protected":false},"author":7,"featured_media":8475,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[16,18,21],"tags":[],"ppma_author":[48],"class_list":["post-8468","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital-news-feature","category-financial-planning","category-tax-news"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.0 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Minimizing Tax Liability and Leveraging Efficiencies With the New Tax Law<\/title>\n<meta name=\"description\" content=\"Many strategies are becoming clearer after addressing the new law with our 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