Sound Tax Strategy, Not Sneaky Loopholes

 

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.

Jarrod Bridgeman
Hello, and welcome to The Millionaire Dentist. I am your host, Jarrod Bridgeman. Today Casey is out—he's on fall break, vacationing with his family, and then he'll be attending an event later this week. So instead, I brought in an even smarter man: his name is Kevin Rhoton, and he's a CPA and an MBA. Kevin, how are you?

Kevin Rhoton
I'm doing great. Getting ready for fall. Love this time of year.

Jarrod Bridgeman
What's your favorite part of the whole fall season?

Kevin Rhoton
The temperature. We like getting outdoors—sometimes we'll go camping. We're not this year, but just campfires.

Jarrod Bridgeman
Yeah, I love this season. I'm also a spooky movie and TV show guy, so it's a good time to put those on as well, Kevin. Today, you had shared with me an article that you had been reading about taxes and legal ways to do things with your taxes, and I believe you had come up with a top four-ish kind of list.

Kevin Rhoton
Yeah, yeah.

Jarrod Bridgeman
Start at the top for me.

Kevin Rhoton
Sure. It talked about quote-unquote "tax loopholes," and when practice owners ask—especially when they ask us about tax loopholes—what they're usually looking for is, "Am I doing everything the tax code legally allows me to do?" And that's really a tax planning question.

Jarrod Bridgeman
Is that really a loophole, or is it just part of it?

Kevin Rhoton
I don't really like that terminology. Yeah, it's just effectively using the tax code.

Jarrod Bridgeman
See, because "loopholes" makes it sound like you're getting away with something.

Kevin Rhoton
Really, it's maximizing the use of the tax code to your benefit.

Jarrod Bridgeman
So these aren't necessarily secret tricks by any means, but there may be ones that people are either unfamiliar with or maybe not even doing correctly.

Kevin Rhoton
Exactly. There usually isn't one magical deduction that changes everything. The biggest tax savings tends to come from coordinating several perfectly legitimate strategies throughout the year.

Jarrod Bridgeman
So let's kind of start with the biggest one—like a big-picture decision here—and that would be how the practice itself is structured. Does that really, honestly make that much of a difference?

Kevin Rhoton
Yes, it does. Entity structure has a significant impact on the owner's total tax picture.

Jarrod Bridgeman
And this is kind of talking about, like, the S-corp, C-corp, sole prop, that kind of stuff.

Kevin Rhoton
Yep, and for a profitable dental practice, an S corporation often makes the most sense because in that entity structure, only reasonable compensation to the owner is subject to payroll taxes, while the shareholder distributions are not subject. Sole prop, everything is subject to self-employment taxes.

Jarrod Bridgeman
So would a sole prop be more for a smaller business, like a side business?

Kevin Rhoton
Yes, that's a perfect way to look at it—like someone who might do photography on the side or something. That's more of that.

Jarrod Bridgeman
And on the other side of that is the C-corp structure.

Kevin Rhoton
Where that's more for huge corporations, and you see that especially with publicly traded companies. A dental practice owner doesn't need to be a C-corp. That implements that double taxation idea that we've often talked about.

Jarrod Bridgeman
And again, if it's just you or you and a partner, you're starting to go with the S-corp.

Kevin Rhoton
Yeah, and that also opens up big planning opportunities for owner payroll, retirement plan design, pass-through entity tax opportunities, distributions, and many others that S-corps open up.

Jarrod Bridgeman
Someone listening out there who's a sole prop or already a C-corp—is that something that can be changed, or are they locked in with whatever they originally signed up with?

Kevin Rhoton
No, we've helped many practices that partner with us change those designations—that entity structure. Now, there is some nuance when going from a C-corp to a different entity.

Jarrod Bridgeman
Sole prop is kind of like the bare basics, and then you kind of move up from there. Okay, that makes sense. And usually, we would recommend having someone like an accountant or CPA kind of help you navigate that.

Kevin Rhoton
Yep, that sounds like it could be complicated if you don't really know what you're doing.

Jarrod Bridgeman
Sometimes you come in here just like this and talk to me about tax stuff, and I nod my head and smile. You know, I'm here for my looks on this podcast.

Kevin Rhoton
Yeah, that works out! Like my mom said, "a face for radio."

Jarrod Bridgeman
Yeah, your looks over audio are pretty excellent!

Kevin Rhoton
The tax strategy here isn't just becoming an S corporation; the real strategy is making sure your entity structure and those associated tax strategies still fit the practice that you have today. It's very relevant for dentists because the practice they started five years ago or 10 years ago may be very different now.

Jarrod Bridgeman
When you've made these changes for people, or have seen these changes being made, what has been the impact that this could have?

Kevin Rhoton
We've seen well into the five figures in tax savings.

Jarrod Bridgeman
Oh, wow! In tax savings?

Kevin Rhoton
Yeah, that's huge.

Jarrod Bridgeman
Moving on to the second topic here that you've got: equipment. That's something that dentists—obviously, you guys listening know this—spend a lot of money on. Much of it's needed, but sometimes people get excited and buy stuff that may not be needed, but it looks fancy. So we're getting towards the end of the year here—it's October already—and you might be having those sales reps coming in and saying, "You know what, it's a good time to buy. You write all this off on Section 179. You can just write it all off." Yeah, that's great advice, right?

Kevin Rhoton
Yeah, great advice—it's about as forward-looking as your nose. Dental practices need to buy expensive equipment from time to time—those chairs, those scanners, imaging equipment, and even buildouts or renovations. A lot of times, those are legitimate and needed, and accelerated depreciation and Section 179 bonus can potentially create substantial current-year tax deductions.

Jarrod Bridgeman
Right. If I remember correctly from talking to you previously, even if you bought it in December, it has to be in use by the end of the year, right?

Kevin Rhoton
Yes.

Jarrod Bridgeman
Okay, so I can't just buy it, leave it in my closet for a month, and then return it.

Kevin Rhoton
Right.

Jarrod Bridgeman
And spending money to quote-unquote "save money" isn't the best plan of action.

Kevin Rhoton
That's one of the common strategies we see with practice owners. They get to quarter four, realize they're going to owe a lot in taxes, and then go and spend five figures on equipment just to create a tax deduction. Sometimes they'll even finance that purchase, which means now they're committing themselves to years of payments and interest just to reduce this year's tax bill a little bit.

Jarrod Bridgeman
And so, let's say they spent five figures—how much would they actually save on taxes? What's the trade-off?

Kevin Rhoton
You're actually only looking at saving maybe 30 cents on the dollar. It's your marginal tax rate, wherever you are.

Jarrod Bridgeman
So let's say you drop $10,000 on something; you might be saving $3,000.

Kevin Rhoton
And really, that's low-level tax planning. We like to come back to a pretty simple principle: never needlessly spend $1 just to save 30 cents in taxes. Higher-level tax planning is really about looking for ways to reduce taxes while preserving that cash flow. Practice owners will spend $10,000 just so they don't have to write a $3,000 check.

Jarrod Bridgeman
And sometimes they look and complain about the potholes out front.

Kevin Rhoton
Right. Yeah, and they'll sometimes really justify it, like, "Yeah, I quote-unquote need this, or this would be nice." Again, higher-level planning is: let's plan for that as part of the overall business planning and practice improvement in the future. Let's cash flow that...

Jarrod Bridgeman
And then use that money towards your retirement savings, investing, or paying yourself more.

Kevin Rhoton
Exactly right.

Jarrod Bridgeman
Growing up in Indiana in a small town, on the farmer level, people will have their kids work the fields or work their farmer's market store. When it comes to employing your children in your practice, sometimes that pops up on TikTok or Reddit where people say, "Oh, I've got a kid, I'll throw them in there and give them some money." That doesn't always seem legitimate, or maybe they're not making it legitimate enough.

Kevin Rhoton
Yeah, it can be legitimate. A lot of times, practice owners don't go to the necessary steps of making it legitimate. Employing children can be a very effective strategy to legitimately shift some income from the practice owner's higher tax bracket down to their kids. It creates earned income for the child, giving them the ability to fund an IRA.

Jarrod Bridgeman
And kids love nothing more than IRAs!

Kevin Rhoton
Oh, yeah!

Jarrod Bridgeman
Tell them, "Hey, I contributed some money to your IRA; you can't touch it for 60 years." "Did you get me any Pokémon cards?" But so if I have a kid and a practice, I can't just throw them the drill and let them go?

Kevin Rhoton
Well, no. They have to be a hygienist or at least an assistant! You can't simply put your six-year-old on payroll for $20,000 because you heard about it on social media. They need to have legitimate duties and age-appropriate work.

Jarrod Bridgeman
Don't put them in the mouth!

Kevin Rhoton
That's right. They can clean, take out the trash, etc. And it does need to be reasonable compensation. You can't pay them $100,000 just to take out the trash. Another thing that's also important is time records and documentation. Actually add them to payroll so you have that documentation.

Jarrod Bridgeman
So can you put anybody's kids on there? If I have a bunch of children taking up space, can I bring them in and force them to work?

Kevin Rhoton
No. It depends on state laws, but there are specific guidelines if it's the practice owner's children versus other minors. The goal isn't to manufacture a deduction in and of itself; it's to take a legitimate expense of a family employment opportunity and structure it correctly.

Jarrod Bridgeman
It's a bonus to you for working with your children, versus being the sole goal of tax savings. Money is still coming out, but at least it's going into your nuclear family.

Let's talk about year-end tax payments. What if the owner is still going to owe a lot in taxes?

Kevin Rhoton
A lot of times, practice owners will have their one meeting with their tax preparer coming into year-end, and all of a sudden they have a huge tax bill because they haven't had tax projections at each quarter. They meet in October, November, or early December, and find out they're going to owe $100,000 or $200,000 in taxes. The Q4 estimate is due January 15th, right after the holidays.

Jarrod Bridgeman
Would this sometimes be the root issue? Not paying their quarterly estimates closer to where it needs to be, based on old info?

Kevin Rhoton
Yeah, and something we do is custom tax projections at each quarter and customized quarterly estimates for our clients, so that when Q4 and the January 15th estimate come around, it's predictable.

Jarrod Bridgeman
So when April 15th comes around, you're not just punched in the mouth by that bill.

Kevin Rhoton
The key is to spread that tax liability out. We also look at state pass-through entity tax elections and payments, which can help on your federal tax bill.

Jarrod Bridgeman
If you know you're going to have massive things coming up, this might be the time to start figuring out 2027 now and pre-planning so you don't have to fork over this much cash all at once.

Kevin Rhoton
When we go into Quarter 4 projections, the strategy isn't just finding another quick-hit deduction; it's determining how to satisfy the remaining tax obligation efficiently and reduce underpayment exposure.

Jarrod Bridgeman
Kevin, if there's one thing you wanted owners to remember from this podcast, what should it be?

Kevin Rhoton
The common thread through all four of these is that none of them are really "loopholes." They are provisions intentionally put into the tax code, and the opportunity comes from coordinating them correctly and doing the planning before the year is over. The worst time to discover a missed tax planning opportunity is when your accountant is preparing the tax return three or four months after the year is already over.

Jarrod Bridgeman
And then people are filing extensions, racking up penalties, and all kinds of stuff. Kevin, thank you so much for stopping by.

Folks, if you're listening to this tonight, this is Thursday, October 15th. We'll be in Chattanooga and Knoxville, Tennessee, at Ruth's Chris for both events. On November 5th, we're going to be in Athens and Savannah, Georgia, followed by November 12th in Charlotte and Winston-Salem, North Carolina. We're ending the year in Austin and Houston, Texas.

Visit fourquadrantsadvisory.com, click on events/upcoming events, and register if you haven't yet so you can start making more money, saving more money, and living the life you want.

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.