Stop Chasing Shiny Tax Deductions: What Dentists Get Wrong

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 The Millionaire Dentist Podcast in studio with co-host Jarrod Bridgeman.

Jarrod Bridgeman:
Casey, I know you had a great day yesterday. You were celebrating Presidents' Day.

Casey Hiers:
Is that right?

Jarrod Bridgeman:
Yeah.

Casey Hiers:
I took it off for other reasons, but-

Jarrod Bridgeman:
Yeah. It was George Washington and Abraham Lincoln's combined birthday thing.

Casey Hiers:
Well, what do we have? How many presidents have we had? 46. Probably about five of them were any good.

Jarrod Bridgeman:
I won't name which ones.

Casey Hiers:
Is the time I going to get political. I'm very excited.

Jarrod Bridgeman:
A little bit, yes.

Casey Hiers:
Yeah. I see Kevin Rhoton is here. Kevin.

Kevin Rhoton:
Hey guys.

Casey Hiers:
MBA CPA? MBA? M.

Jarrod Bridgeman:
M.

Casey Hiers:
We just had the All-Star weekend here in central Indiana. MBA CPA. Kevin Rhoton.

Kevin Rhoton:
Hello.

Casey Hiers:
Just walking in here like Conor McGregor with a swag just hanging out with us today.

Kevin Rhoton:
Oh, yeah. Looking forward to it.

Casey Hiers:
I was going to skip this one and-

Jarrod Bridgeman:
Yup.

Casey Hiers:
Now I'm here. And I guess we're talking tax. Is that the-

Jarrod Bridgeman:
Yes.

Casey Hiers:
Is that the play?

Jarrod Bridgeman:
We're going to be talking about people who like to chase tax deductions.

Kevin Rhoton:
Yeah. Don't go chasing tax deductions.

Jarrod Bridgeman:
That's right. Can you see me a little couple bars?

Kevin Rhoton:
No. No. No. No.

Jarrod Bridgeman:
Kevin, one of the ones we've talked about on a previous podcast that can be seen as a good way to help reduce your taxes is paying children through your practice, preferably your own children.

Kevin Rhoton:
Yeah. Yeah. Paying your children through the practice, and not just practices, but across all businesses is that's sometimes one of those shiny tax deductions that people think, "Oh, I can shelter some of my money."

Jarrod Bridgeman:
Yeah. Can I just hoard like 80 grand a year under my kids' pillow?

Kevin Rhoton:
No. No, you cannot.

Jarrod Bridgeman:
Okay.

Casey Hiers:
Now I'm getting my sea legs. So, Presidents' Day government taking our money, taxes and the dumb stuff, practice owners obsess over tax wise because they don't have any other clues. Is that what you're going to get into today? Absolutely. The kids, the cars, they run this through the practice. They run out through the practice. Look at me tripping over nickels to get the dollars.

Kevin Rhoton:
Yeah. Yeah. There's actually quite a few of those shiny tax deductions that are not really what they seem to be on the surface.

Jarrod Bridgeman:
And these would be sometimes ones that are atypical of a standard CPA advising their clients to do?

Kevin Rhoton:
Yeah.

Jarrod Bridgeman:
So, when I come to you and I'm like, "Kevin, can I just..." I've got two kids. One's six years old. I'm going to hire him for 70 grand a year to clean my office for me. That's great. Right? That's a good idea.

Kevin Rhoton:
You might get away with that for a little while, but it'll catch up to you. Paying your children. I don't want to say, "No. You can't do that." That's not the case. But it's not the slam dunk that all practice owners think it is. For 2024, you could pay your children a child $14,600 and they wouldn't have to pay federal income tax-

Jarrod Bridgeman:
That's a years?

Kevin Rhoton:
... on that. In a year. Yeah. Annually, 14,600. So, on the surface you're thinking, okay, if you're in the 25, maybe federal 25% tax bracket, maybe we'll say for instance, 5% for state, you're looking at, okay, if I could shift almost $15,000 in income to my children, that's a 30% tax savings. However, you don't think about... If you're an S Corp, you're paying payroll taxes on that. So, you're looking at already 15.3% in social security, Medicare plus you have unemployment taxes, federal, state, food, and SUTA. So, at the end, you're-

Casey Hiers:
SUTA.

Kevin Rhoton:
State unemployment tax.

Casey Hiers:
Look at you looking at me with all your letters.

Jarrod Bridgeman:
I was thinking it was the Genesis song.

Casey Hiers:
Suda.

Jarrod Bridgeman:
Suda (singing)

Casey Hiers:
I love how you looked at me and explained his acronym. You may proceed, Kevin.

Kevin Rhoton:
All right. But yeah, adding all that in, you're actually saving less than 15% or about $2,000.

Casey Hiers:
No, that's a great point. Because people think that that is such a sophisticated thing to do two grand, we're not scoffing at two grand, but I mean, I don't know. Take your friends to a nice dinner and have a couple bottles of wine and you're going to get there. So that is not the slam dunk like you had mentioned, right?

Jarrod Bridgeman:
No. And if your practice is collecting a million over a million dollars. Two grand is very minuscule amount comparatively.

Kevin Rhoton:
And that's not counting the expenses, the extra filing fees. So now you're paying-

Casey Hiers:
Well, plus the cleaning company, you actually have to hire to clean your place that your kid doesn't clean. Very good.

Jarrod Bridgeman:
Right. Right.

Kevin Rhoton:
So yeah, it's not the slam dunk on tax savings. There is a little bit there if it's done right, but there's so many hoops to jump through.

Casey Hiers:
And there's cases where we do this, you do this, it's the right thing for the right situation.

Kevin Rhoton:
Yup.

Casey Hiers:
Yeah.

Kevin Rhoton:
There is strategy there, just not excessive.

Casey Hiers:
It sounds less impactful than most people make it sound 'cause I hear that a lot. Oh, I want to do this or that. I feel like my accountant is too conservative. Typically, they're just lazy. That's what we end up seeing. And for those accounting firms who listen to this podcast, my apologies, I'm sure you're great, but for dental specific practice-

Jarrod Bridgeman:
Sure. You've got a good personality.

Casey Hiers:
Yeah. But for dental specific practice owners, it doesn't cut the mustard.

Kevin Rhoton:
No. And there's actually another side of it that practice owners aren't maybe cognizant of is you got to follow child labor laws. There's federal law, there's actually a lot of states that have a lot stricter age restrictions on top of the federal laws.

Jarrod Bridgeman:
Yeah. So, you might want to look at your particular state as well.

Kevin Rhoton:
Yeah. Yeah. There's some states that even for your kids, it's like, no, you can't-

Casey Hiers:
I never thought of that. That's-

Jarrod Bridgeman:
Well, real quick, I did want to touch upon, you said that the cap was at a little over 14,000 a year.

Kevin Rhoton:
Yes, 14,600.

Jarrod Bridgeman:
So, if you pay your kid 20K, what happens then?

Kevin Rhoton:
Then that kicks them into having to owe income tax, and so that even makes the savings less.

Jarrod Bridgeman:
All right. Okay.

Kevin Rhoton:
Yeah. Child labor laws... Also, it really needs to be look like a arm's length transaction. The pay has to be reasonable, can't be excessive, and that job needs to be suitable for their age. IRS, social security. They know when they issued that social security number, they know how old that kid is. So, sorry, but paying your toddler front desk admin wages isn't really going to fly. So, it has to be reasonable. It has to be suitable, and it has to be set up properly, keep records. And yeah, you got to keep in mind if you're audited, that's one place the IRS is quick to investigate is family members payroll.

Jarrod Bridgeman:
Okay. So, we've got the kids covered one that we've talked about several times, but it's always good to touch upon again, for anybody that's new, that's listening. Buying new equipment to pay less taxes, great idea.

Kevin Rhoton:
It can be, if it's necessary.

Jarrod Bridgeman:
Okay.

Kevin Rhoton:
Probably a lot of people listening toward the end of the year, they probably got a call from their equipment sales rep talking about incentives and probably even mentioned a section 179 business tax deduction.

Jarrod Bridgeman:
Sounds sexy.

Kevin Rhoton:
So, for that unnecessary equipment. It can be just throwing money away really.

Jarrod Bridgeman:
So, you might be trying to spend $10,000 on that piece of machinery to try and save two grand.

Casey Hiers:
Spending money or going into debt is a terrible tax strategy.

Jarrod Bridgeman:
Right.

Casey Hiers:
And what are you going to use it for. Hopefully not a expensive coat hanger. And I'll use that joke from time to time out and about and I don't know, 30%, 40% laugh and go, "Well, I use these two things I bought, but this one thing I bought one year. I don't use it at all." And they basically concede and agree. Yeah. That can happen.

Jarrod Bridgeman:
Right. Right.

Kevin Rhoton:
Yeah. You're spending all kinds of money on depreciating assets instead of maybe appreciating investments, the opportunity costs. And also on that tax deduction, it's only available if you have a good basis. If you don't have, I think we've had a podcast about that recently.

Casey Hiers:
Yeah. Go back in the library and listen to that one.

Jarrod Bridgeman:
Yup. Covering all the bases on tax basis. That's the name of that episode, everybody.

Kevin Rhoton:
But yeah, if you don't have good basis, then you can't take the section 179. So there goes that shiny tax deduction-

Jarrod Bridgeman:
So, you spent money on something you may or may not need, hoping to get a tax deduction, then you can't even get the deduction.

Kevin Rhoton:
That you don't get. Yup.

Jarrod Bridgeman:
Okay.

Kevin Rhoton:
But instead of wasting that $10,000 on an unneeded piece of equipment, just so you don't have to pay 3,000, say you're in that 30% tax bracket. So, you're spending 10, so you don't have to pay Uncle Sam three and yeah, take the $7,000, invest it. So that you have 10,000, 14,000 and long after that piece of equipment would've been hauled off. You now have more money.

Jarrod Bridgeman:
You have a nice little pocket there.

Kevin Rhoton:
Yeah. And again, I'm not talking about equipment that's needed.

Jarrod Bridgeman:
Equipment that's needed, or maybe you've decided to add a new procedure and you've actually gone through the courses of whatever it takes to get that. That's a very reasonable... That's a good reason to get that equipment.

Kevin Rhoton:
Yes. That's the reason not-

Jarrod Bridgeman:
But it's going to bring in money.

Kevin Rhoton:
Not chasing that tax deduction.

Jarrod Bridgeman:
Okay. Kevin, I was thinking about this the other day. My wife has her own LLC. And I was told not by anybody here, but then this was years ago, of course, that my wife and I can just go out to dinner whenever we want and just chalk it on up, make that a business meeting. We talked about her QuickBooks for about 12 minutes. That's a thing that people think is they can do.

Kevin Rhoton:
So, deducting business meals, deducting business meetings is definitely one of those tax deductions that's misused, overused. The idea behind that deduction is for S Corp, a lot of practice owners are organized as S Corps. They can have up to 100 domestic shareholders. So, when the IRS is talking about those annual business meetings, now that's not to say that for husband and wives or one or two shareholder owned S Corps can't utilize that, but it's not to use on your Caribbean vacation. And yeah, I'm not saying it's all or nothing. A lot of times you can utilize those, whether you're going out of time for continuing education, a seminar, a lecture, like you said, a convention. A lot of times practice owners will group that with a vacation. Now you do have to separate personal and business expenses, but that travel can be is tax-deductible.

Jarrod Bridgeman:
You had a fourth option that we wanted to talk about today. What about... And I've seen people who have done this before too, business vehicles.

Kevin Rhoton:
Another area that can be overly taken advantage of.

Casey Hiers:
Can be useful, but also can be problematic.

Kevin Rhoton:
Absolutely. So, the IRS, they actually have... It's a 50% business use rule pretty flat out. And that's the business owner has to use that vehicle for more than 50% business use to be incorporated into the practice, to be purchased by the practice for the expenses to run through the practice. And that's excluding commute.

Jarrod Bridgeman:
Wait, so it doesn't count driving to and from work?

Kevin Rhoton:
That's correct.

Jarrod Bridgeman:
But it would count if I had to go from the practice to maybe I'm speaking somewhere or-

Kevin Rhoton:
Yup.

Jarrod Bridgeman:
Okay.

Kevin Rhoton:
Yeah. Supply runs, CPE, lectures, meetings with colleagues, meetings with patients, any of those.

Jarrod Bridgeman:
What if you signed up for this really cool bourbon and financial advice event. You get to meet Casey Hiers. Would that be useful for a business vehicle?

Casey Hiers:
If you drove 90 minutes one way to go to a CE event.

Kevin Rhoton:
Yes.

Casey Hiers:
Okay.

Jarrod Bridgeman:
So, Casey, let me ask you. You're the one with the boots on the ground out there. Do these kind of cover the things you hear owners talk about and mention when they're trying to save on taxes?

Casey Hiers:
Yeah. Here's the before and after. Most of these things get mentioned in some regard, and then by the end, if we end up getting all their information, looking at a consultation, all of the areas that we will work to improve on structure differently, do the right way for practice owners. I mean, there's tens and tens and tens of thousands of dollars that our impact can be with these folks, but they're stuck with, my kid is on the website, so I'm going to pay them to be a model and do the 14-6 and get what we just find out a couple of $1,000 for all that hoopla and then the car.

Jarrod Bridgeman:
Yeah. I mean, that's what we hear. But it comes from a... Doesn't come from a place where people are uneducated.

Casey Hiers:
Right.

Jarrod Bridgeman:
I'm sorry, are dumb. They're just uneducated.

Casey Hiers:
Right.

Jarrod Bridgeman:
They're not aware and they know that they're paying too much to Uncle Sam.

Casey Hiers:
Yup.

Jarrod Bridgeman:
And so, they're frustrated. So, they're trying to figure out what can I do? But again, this is all about some of the little things where in reality, and you might get into this Kevin a little bit. But entity structure and how you're setting up different income, and there's so many things that if you do it the right way, you're actually tax liabilities reduce 50, $60,000 a year. That's what we do.

Kevin Rhoton:
So, with that business use of the vehicle, so if it is in the practice, the IRS expects to see a percent of personal use on that W2 or the wages for the practice owner 'cause I mean, nobody's using their vehicle 100% for business. So, a lot of times we recommend just something that's easier and just as beneficial is using the standard mileage rate, just make it a personal vehicle, pay for it personally, and then-

Casey Hiers:
Like 64.5. What is it now?

Kevin Rhoton:
67 cents a mile for 2024.

Casey Hiers:
More inflation. So that makes sense.

Kevin Rhoton:
Yeah. All you have to do is keep track of the mileage. There's plenty of apps on the App Store out there that's-

Casey Hiers:
There's a lot of pens and paper too that you can keep in a glove box.

Kevin Rhoton:
Yup. Yeah.

Casey Hiers:
Find somebody as good at doing your taxes as you are as doing implants, or root canals, or whatever dental procedure you're doing.

Jarrod Bridgeman:
Right.

Casey Hiers:
There's your tagline, Jarrod.

Jarrod Bridgeman:
Kevin, anything else you want to follow up with in this on?

Kevin Rhoton:
I don't.

Jarrod Bridgeman:
Okay. All right. I really appreciate you being on today, Casey. You are about to head out this week, aren't you? Aren't you going somewhere?

Casey Hiers:
Yeah. The team's going to be at an orthodontic meeting in Georgia to Ritz-Carlton. We've got people at the midwinter. We've got somebody else at a dental society.

Jarrod Bridgeman:
We're going to be all over the place. And if you are interested in talking to us, just come on up. Check us out on Facebook and Instagram and LinkedIn, Twitter, or X, whatever we call it now. Go to fourquadrantsadvisory.com/events to see where we will be next. Thank you all for coming and have a good day.

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.