On today’s episode of The Millionaire Dentist, Casey Hiers sits down with Colton Smith and Steve Levy of Four Quadrants Advisory to discuss if and when tax write-offs can actually benefit you and your practice.
Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry, finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
Hello, and welcome. This is Casey Hiers back at it again for another episode of the Millionaire Dentist Podcast. I have two special guests with us in studio. From our tax and accounting team: Steve Levy. He is a CPA. He also went above and beyond, and is just kind of a show-off with his law degree. I believe that is a J.D. after your name. We also have Colt Smith. He's a key part of our tax and accounting team as well.
I asked them to join me today because I keep hearing from practice owners around the country, like most people, "How can I pay less taxes?" Today's topic is going to be about tax write-offs and I hear a lot of practice owners who try to chase tax write-offs. We're going to jump in to some of that today and talk about the good and the bad of tax write-offs, and how maybe the focus shouldn't be entirely on that, but have a diverse view of it. Steve, welcome. Thank you for joining us.
Steve Levy:
Thank you Casey.
Casey Hiers:
Colt, thanks for coming in studio today. Great to see you again.
Colt Smith:
Yeah. Thanks for having me again Casey.
Casey Hiers:
Absolutely. Well, let's just jump right into it. For our listeners who... Hey, we all feel like we pay too many taxes, right? But for our listeners who are concerned about their tax management, tax write-offs, my first question is, what's a common perception out there as far as tax write-offs go, Steve?
Steve Levy:
I would say that, typically, what people think of is that there's some magical tax write-off that you should take advantage of at all times, regardless of price, regardless of the cost it is to you, just take advantage of it, you're going to save lots of taxes and the audit proof, this is a sure thing.
Casey Hiers:
They feel like that magic bullet's out there; they just want to find it?
Steve Levy:
Yes. And it should just happen. Don't even think about not doing it, just do it. And even though you could be spending a lot of money, that's okay because you're going to save taxes. The magic thing is, saving taxes at all cost.
Casey Hiers:
A singular focus?
Steve Levy:
Right.
Casey Hiers:
Almost through a vacuum. Okay
Colt Smith:
Yeah. I would elaborate on that and say that people think that saving taxes, getting write-offs, that's the number one goal of a business. The number one goal of business is to build profit, to save money. So, if you're trying to find any sort of tax write-off or tax deduction that you can find, you're still spending that extra money to save money, right? So, if you spend a dollar to save 30 cents, you're still spending that extra 70 cents to get that 30 cents of savings, so that's not a great strategy. It's not something that we're definitely going to propose to anyone. So, it's all about billing that profit in the practice. Don't go out of your way to try to find write-offs and tax deductions.
Casey Hiers:
Well, and you guys bring up a very good point, is that... back to the question... that common perception is, "There's a whole bunch of magic bullets out there," to quote you Steven, "And if I can just figure those out and do them, I'm going to pay less taxes. Kumbaya, everything's great." And from a tax management standpoint, obviously, you guys have seen when it all goes wrong and it implodes because maybe somebody got a little more aggressive. I want to spin off of that question. Those were common perceptions of write-offs. What's a common misconception out there about tax write-offs or chasing those tax write-offs? What's a misconception, Steve, that you would say?
Steve Levy:
The biggest one I would say is that it is a sure thing that, "If I do this, then, A, I will automatically save a ton of tax and, B, that don't worry about the IRS looking at my taxes because even though I may be all of a sudden getting a $100,000 savings in taxes, that the IRS won't necessarily look at that because they have other things to worry about." There's one thing that's called the IRS lottery and it's a percentage of people and businesses that are audited that, "I won't hit the IRS lottery and be audited." But really, you should be going forward in thinking that, "Okay, can I defend this position that I'm taking as far as the tax write-off and is it too good to be true?" Sometimes it is.
Casey Hiers:
I know we have some listeners out there who maybe aren't practice owners and some may not even be dentists; they are interested in financial topics. I'm going to give a dumbed down example that I just thought of. I pull into a parking lot. I see all the cars around me have all of their windows cracked and their sun roof open on a hot summer's day. There's clouds in the sky, but I look around and I see everybody else has their windows down. It's not going to rain in my car. No issue, crack those windows. [inaudible 00:05:18] think that I heard my friend or my colleague uses this technique or that technique, they give very little credence to, "Is this above board? Does it make me vulnerable?" and so they just do it.
One thing I've been hearing a lot of is something called a conservation easement. I hear from a fair amount of practice owners that they have a friend who does it or they're considering doing it, or even are doing it. This is a topic that we can go down a rabbit hole very far. We're going to stay about an inch deep and a mile wide on this, but in terms of these conservation easements, its original form, it was granted when a landowner permanently protects pristine land from development, so it had a noble origin.
How it's evolved is they've been packaged by folks seeking profit, middlemen known as promoters, and they are involved in buying up the land. They find an appraiser willing to declare that this particular piece of land has huge development value, and is thus worth many times more than the purchase price, and a lot of wealthy investors are folks with some money around, this is attractive to them. There are some issues though, where these appraisers are sometimes appraising this land five, seven, ten times more than it's actually worth because they claim that this land could be a resort and could have all this profit. And so, I know that a lot of folks like the sound of a conservation easement. I want to get a high level take, Steve, on your opinion from this.
Steve Levy:
Well, it is a legitimate contribution deduction. They even have a special box for it on the tax return for when you claim it. However, from our perspective, I would say that you have to look at, first of all, the risk involved in taking that deduction. On the return that you take the deduction at, your deduction might be sizable and your tax rates may go down to the long run, but that's a red flag because the IRS will look at your prior return, your current return, "Okay, what changed?" So it will notice what's happened.
Secondly, the IRS has known about this deduction for years and they have it on their radar and they've had lots of challenges towards this. The biggest one that you mentioned is the appraisal and that's what everything hangs on to this: is this a qualified appraisal? One thing that you have to do when you claim this deduction is to attach the appraisal to the tax return, so the IRS gets the appraisal, they get the fuel to challenge the deduction and they will try because it can be a large tax loss for them. So they will give it a try and they have ever since this existed, so there's risk. And also, is the reward worth it? We're talking about chasing tax write-offs. What did you put into it now and what will you have to put into it in the future to maintain this write-off in one year? So, those are a few of the things to look at.
Casey Hiers:
Well and obviously, we encourage our listeners out there, do your own research. We're definitely not going to get to the bottom of these rabbit holes, but we just want to make people aware. One of the things I've noticed that is it appears there's a sizeable upfront check that needs to be stroked to get in on this; there's a decent tax break involved. One of the areas that's not talked about is how year after year, it needs to still be paid or funded, yet that tax break is heavily on the front end of this. And then, again, that money isn't liquid. The liquidity and availability of that money isn't instant. For instance, if there's a bad day, a bad month, a bad quarter, a bad year, you may need to tap into that. That money is held in place and that's a real bugaboo. Here's the one that got me.
Back in 2019, the IRS added this to its annual "dirty dozen list" of the worst ways to... They call it tax scams. But this same thing, not only was the IRS looking at it, the US Department of Justice filed a fraud lawsuit against a handful of these promoters responsible for generating, really, they said $2 billion in improper tax write-offs. And now the Senate Finance Committee is investigating the very same thing and requested thousands of pages of documentations from just six of these promoters doing it.
I say all that for this, Steve mentioned it, people don't assess risk. People don't look at what is the worst thing that can happen because they're blinded by chasing a tax return; they know somebody who does this; it sounds pretty neat, "I'm going to write a big check." Anytime these two and three entities have it on their radar, that's something I would want to stay away from: between that and that investment not being available or liquid in terms of its original layout of money. I don't think it's the most attractive thing out there. Again, our listeners will have to do their own research.
The whole point of this is to caution those practice owners who are just obsessed with chasing tax write-offs. You guys will probably say this, but listen, we all have to pay taxes. There's no way around it. You know you have a good tax team in place when they're providing accurate quarterly estimates, when you're not getting hit with tax surprises, when your tax management situation you are paying the least amount of taxes possible while also staying, not only out of trouble, but off the radar. And this conservation easement is the definition of being on the radar.
I appreciate you touching on that. I know some listeners hear this and wonder what it's about. Again, do your own research, but there's definitely some gray areas to this that aren't talked about or promoted very often. Guys, what should practice owners think about when it comes to taxes? I know I just went into one... or just one part of it. But taxes as a whole, how should a practice owner view that? What should their lens be?
Steve Levy:
Well, taxes are necessary. Taxes are required. When you're doing well in your practice, you're going to pay more taxes. That's just the nuts and bolts about it. So, in a way... and as a tax person, I cringe that I'm saying this... but in a way paying more taxes means you're being more successful and things are going well.
Casey Hiers:
Yeah. No, that makes sense and sometimes people don't want to hear that, because to your point at the beginning, they feel like they're missing out on some magic write-offs and that can be flawed thinking sometime. Colt, what are some tax traps when it comes to tax write-offs? What are some, some areas maybe for our listener to be aware of or cautious of
Colt Smith:
Sure. Just a few that come to mind right away is year-end bonuses. A lot of times practice owners may not run bonuses through payroll. They might just cut their employees a check or give them a big hefty gift. Well, when it comes to gifts, you can only get a $25 deduction per employee per year. So, if you're not running it through payroll or are doing it the most accurate way, you're missing out on a lot of that write-off that you could be getting.
Another area is entertainment. Entertainment's no longer deductible, so if you're planning ongoing to a huge concert with a bunch of people and trying to write that off through the business, you can't do it anymore. You just got to be aware of that. For doctor meals, you got to make sure that you have the correct support and documentation, that it was a true business meeting, a true business meal. You can't just go out there and have a lavish meal for lunch or dinner just because you want to. You have to have some sort of support. A big thing with tax write-offs and the tax law, there's a lot of black and white, sure, but there is a lot of gray. And so, having that support and documentation to back up anything that you're trying to write-off is very, very, very important.
Casey Hiers:
Well... A lot of times people change behavior when they get that tax surprise and we've talked about these over the course of our podcasts. But again, depending on what overall revenues are, if you're getting refunds or bills of 25, 35, 45, $50,000. I mean, we hear $80,000 sometimes, that's what the important part is. Instead of chasing write-offs, spend that time working with your accounting team to make sure your quarterly estimates are on point, to make sure that it's being monitored on a monthly and quarterly basis, not annual or bi-annual - that's the focus. Let your accounting team do what they're good at. Hopefully, they're dental-specific and really understand practice owners, but let that team maximize it, keep you in a safe place.
And have your focus be on what? Maybe producing more in the chair, maybe on some case acceptance, and maybe be thinking about, "How could I save $100,000 a year for retirement instead of the 20 or 30 that I'm saving?" To me, that's a better focus for a practice owner instead of chasing these write-offs. Let's end it with this. You guys have seen and heard a lot of stories about chasing tax write-offs, what works, what doesn't work. From a psychological standpoint, again, what would you tell our listeners regarding tax write-offs and maybe to caution them?
Steve Levy:
There's no magic bullet, no magic tax write-off. If you're going to spend it anyway, let's say you're thinking about equipment that'll help your business, make it a business decision first. Now, if you need it and it's getting towards the end of the year, sure, go ahead and buy that equipment. And you might get the write-off in the current year versus later, save some time value of money for the taxes. But think about it more as a business decision and the taxes are just icing on the cake of it, but not the main focus.
Casey Hiers:
I think towards balance, Colt, right? If you can balance excellent tax management, being smart, maybe utilizing a Section 179 deduction for equipment, if you need it?
Steve Levy:
Correct.
Casey Hiers:
But don't get carried away with the write-offs.
Colt Smith:
Yeah, the need. I'm glad you said need there because that's something that we don't want people to just go chasing write-offs because they want to save on taxes. If it's something that you need? Great, okay good. We can go ahead and write that off; you can get the deduction. But the biggest thing for me is people out there should concentrate on making more money on how to cut overhead, not how to spend money to save on taxes.
Casey Hiers:
That was a great point you made. Going to spend 70 cents on a dollar to save 30 cents, if it's things you don't need, that is a horrible strategy: spending money and going into debt to save on taxes. Not a good strategy out there. Well guys, let's leave it there. Again, a lot for our listeners to think about. Again, do your own research, talk to your accounting team about these things. But we would just caution you, don't chase write-offs. There's a lot of potential traps out there that can cause major headaches down the road. Colt and Steve, thanks again for joining us.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
