Tax Planning for Dentists: Avoiding Surprises and Maximizing Deductions

TiIn this episode, CPA Steve Levy provides essential insights for dental professionals on the importance of tax planning and estimated tax payments. We explore the risks of overpaying or underpaying taxes, the benefits of the pass-through entity tax, and the various methods for making estimated tax payments.

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, Casey is not in today, he is out traveling and spreading the good word. So instead, I brought a very, very, very special guest, his name is Steve Levy. He is a CPA, he's a JD, he is a singer. He's also known as the Rock Star of Accounting. Steve, how are you today?

Steve Levy:
Hey Jarrod, how are you?

Jarrod Bridgeman:
Very, very good. I'm really excited that you're in here. It's been a bit since we've had the golden pipes here for us. I brought you in today to talk about something that is almost a ... I mentioned in the last podcast. Sometimes accounting, sometimes with the financial people, all your guys' stuff is like a foreign language to me-

Steve Levy:
Okay.

Jarrod Bridgeman:
Because I don't understand much.

Steve Levy:
I'm here to translate.

Jarrod Bridgeman:
Yes. So we brought you in today and we wanted to talk about tax estimates.

Steve Levy:
Yeah.

Jarrod Bridgeman:
Right. Can you kind of go through ... for those who are maybe new in the business, maybe you've got some students listening, what exactly is a tax estimate?

Steve Levy:
So a tax estimate is something that you need to pay in, ideally, quarterly that you need to pay because you haven't yet covered it with your tax withholdings like from your paycheck. It's kind of a gap payment to make sure you're paying in enough taxes, as a business owner especially.

Jarrod Bridgeman:
That makes sense. So that way this is kind of what helps you ... now normally these are done quarterly, right?

Steve Levy:
That's right.

Jarrod Bridgeman:
And so this is meant to adjust as time goes on because sometimes you go up, sometimes you go down-

Steve Levy:
Sure.

Jarrod Bridgeman:
In terms of money coming in. And that way come actual tax filing time, you're not hit with any major surprises.

Steve Levy:
That's right.

Jarrod Bridgeman:
If it's done correctly.

Steve Levy:
Yeah, certainly. And a lot of times it comes as a shock for business owners that maybe they've been paid just via wages before and now are a business owner and think, "Okay, I've got my wages, but what happens to the tax on the profit?" And that's where the tax estimates really come in. Because the only way you can really pay your taxes on the profit that you have in your business is from paying these quarterly estimates.

Jarrod Bridgeman:
Okay. So let me ask you, your title that you gave me was, why do the tax planning year round? So why is this something that a business owner or a practice owner needs to worry about?

Steve Levy:
Well, because a lot of times when your taxes are being prepared, what you'll get sometimes usually is, here are four vouchers for each of the quarters. We hope it works out for you to pay in enough, we're not sure, but here you go. And that's kind of not the ideal approach for that. Really, you should be monitoring your profit and your tax situation at least quarterly so that you can try to get an avoidance of that tax surprise. Whether it be too much or too little, either one, it's not ideal to be too much or too little.

Jarrod Bridgeman:
When we onboard new clients or even just talking to potential prospects out there, is this something you see on the regular being neglected?

Steve Levy:
Oh yeah. Like I said, usually they'll be given four vouchers representing kind of like a hundred percent of what they paid in before without really-

Jarrod Bridgeman:
And is this kind of based upon the last year's numbers?

Steve Levy:
Yeah, that's what it is. That's all they have.

Jarrod Bridgeman:
Okay.

Steve Levy:
And as any business owner knows, the year might fluctuate and be different. I mean, there's no way it can be exactly the same, that'd be crazy.

Jarrod Bridgeman:
And this is an extreme example, but it did happen in 2020 with COVID.

Steve Levy:
Oh yeah. That was where swings were wildly different. So if people were paying their 2020 taxes based on 2019, it had to be wildly way too much because of the changes.

Jarrod Bridgeman:
So speaking of paying wildly too much or just paying too much in general, why is it a bad thing to pay too much? In my mind, this is a generic layman thing, but I'd rather be covered than not covered.

Steve Levy:
Yeah, you're paying too much, the government gets to keep your money, generally interest free. So you're losing out on the ability to use that money in better ways than giving them that extra.

Jarrod Bridgeman:
So maybe that extra couple grand that you overpaid this quarter could have been used for equipment, could have been used for investing or into a distribution.

Steve Levy:
Right, instead of earning nothing, no kind of return on that money via investment or otherwise.

Jarrod Bridgeman:
So on the flip side of that, I mean I kind of know what the obvious answer is for this, but let's say I'm paying too little. What are some negatives that come out of that?

Steve Levy:
Well, so the government wants you to pay in what you think you owe each quarter. And so if you're not paying in enough-

Jarrod Bridgeman:
Can't they just tell me?

Steve Levy:
Right? They tell you eventually. But they won't tell you that quickly.

Jarrod Bridgeman:
Right, right, right.

Steve Levy:
But they want you to try to get as close as possible in each quarter to what you're going to owe. And if you're behind in that, then it's basically, it's called an under payment penalty. What it is really it's interest and with interest rates still on the high side, that can be a decent amount. And then come tax time, if you're underpaying, then you also have that balance to pay it come taxes.

Jarrod Bridgeman:
On tax day and all of a sudden it's 50, 60 grand.

Steve Levy:
Yeah, get that big surprise there.

Jarrod Bridgeman:
So this is a required ... quarterly tax estimates are required?

Steve Levy:
Oh, they certainly are.

Jarrod Bridgeman:
Okay, okay.

Steve Levy:
Like I said, that's the only way a business owner can pay its taxes on, hopefully, its profit is via these payments estimates-

Jarrod Bridgeman:
Interesting, okay.

Steve Levy:
Each quarter.

Jarrod Bridgeman:
Awesome. Okay, there is a tax I've heard you mention before, called the pass-through entity tax. And to me that sounds like some kind of ghost or something, a spook or a spectacle.

Steve Levy:
Right, pass-through like it's invisible.

Jarrod Bridgeman:
That's right. Can you give me a brief description of what that is and then how does that factor into all of this?

Steve Levy:
Yeah, so kind of stepping back a bit with the Tax Cuts and Jobs Act, what happened was on your itemized deductions, on your personal taxes, there was a deduction for state taxes. And usually before that Act, you got to take as an itemized deduction, as many in state taxes as you wanted that you were paying in. But with that Act, it was capped at 10,000, which is a super low amount. And so what eventually-

Jarrod Bridgeman:
Especially when we're working with businesses that are in the millions in collections right now.

Steve Levy:
Yeah, absolutely. And so that's a crazy low amount. So what eventually most states that have an income tax came around to is that, okay, we know about this tax, we're going to instead allow the business usually a pass-through, a S corporation for most of our businesses, to that business pays the taxes, gets the deduction on the business. And so you're actually getting value for the taxes that you paid and it's sort of substituting for the state tax estimate.

Jarrod Bridgeman:
Got it. Okay.

Steve Levy:
It substitutes it so you don't have to pay it individually and not get the deduction on it.

Jarrod Bridgeman:
Okay, yeah.

Steve Levy:
So it's for the business to get the deduction, where it otherwise wouldn't. And so what it-

Jarrod Bridgeman:
So it's a good thing.

Steve Levy:
It's definitely a good thing. You pass by the $10,000 crazy cap for your itemized deduction if you even itemize at all. And then the business gets the deduction and eventually all states came around to it. It basically substitutes for having to pay in individually this tax. You get a credit for the taxes that you pay on your personal return and you get the deduction that otherwise would've been missing.

Jarrod Bridgeman:
This is why I don't want to do my own taxes ever. All of this, none of this. I'm like, "No, this is why I got somebody named Steve Levy to help me out."

Steve Levy:
Now each state is a little different, sometimes the timing's a little different. The systems are different in how they-

Jarrod Bridgeman:
If someone's out there on their own trying to do this or maybe they have a non-proactive CPA, how would they find out more about their state rules on something like this?

Steve Levy:
Yeah, there are some websites that have it all kind of consolidated like the AICPA has a consolidated list of all states.

Jarrod Bridgeman:
But most ... it's usually pretty ... isn't it like by law, they have to present this information somewhere easily accessible.

Steve Levy:
Yeah, and so generally what you can do is just Google pass-through entity tax and the state that you're in, and it'll have a good amount. Some have been doing it for years, really since like 2018. Some states finally came around.

Jarrod Bridgeman:
Isn't it a little weird to say it's been happening for years, since 2018?

Steve Levy:
It's a little bit weird.

Jarrod Bridgeman:
That feels like yesterday.

Steve Levy:
Well anything pre-COVID feels like ages ago.

Jarrod Bridgeman:
That's true.

Steve Levy:
Because that was a different world. But yeah.

Jarrod Bridgeman:
All right. Let's say I own a business and it's time, it's quarterly tax time. What are some ways that I can pay in these estimates?

Steve Levy:
Yeah, so there's kind of the old school way where you can write a check in. So the dates are generally April 15th, June 15th, September 15th, and January 15th for the last one. And so there's the markers to pay in.

Jarrod Bridgeman:
In terms of a check, does that need to be in their hand by that date or-

Steve Levy:
No.

Jarrod Bridgeman:
Just dated by that?

Steve Levy:
Dated by that date. So generally if you're going to write a check, I would recommend doing it in some way where you could have the date that you actually sent the check, like the mailing, do registered mail or certified, something like that. Where you can actually say if there's any question-

Jarrod Bridgeman:
People still write checks?

Steve Levy:
People still do.

Jarrod Bridgeman:
Okay.

Steve Levy:
But every state and the federal government has a mechanism to pay it electronically. And that's a pretty reliable way. You get a record of what you pay.

Jarrod Bridgeman:
Yeah, usually emailed right to you.

Steve Levy:
Right. It's great, hard copy ... in case mail is not the most reliable thing nowadays. And so it could get lost, that kind of thing.

Jarrod Bridgeman:
You know what's funny is you're speaking of mail sometimes being unreliable. Yesterday I got some stuff in the office from the USPS and they were postcards that I had created to invite some practice owners to an event we were hosting over two years ago. They were mailed out in April of 2022 and they just came back to my desk yesterday.

Steve Levy:
Wow.

Jarrod Bridgeman:
They've been floating around for over two years.

Steve Levy:
What a journey. I'm sure it's got a story to tell for that mail.

Jarrod Bridgeman:
They ended up in Taiwan, it was all kinds of places.

Steve Levy:
Who knows?

Jarrod Bridgeman:
But no, that makes sense. And I feel like a lot of the millennial dentists and possibly younger are more on the instant, pay online, kind of form.

Steve Levy:
Yeah, and they're all ... generally, you wouldn't want to pay via credit card or there'll be fees associated with it.

Jarrod Bridgeman:
Right, right.

Steve Levy:
But most of the time, there's a free option for both federal and state to go ahead and pay that in. So I would say take advantage of that.

Jarrod Bridgeman:
And what were these due dates again? Because they're a little different than what you'd expect.

Steve Levy:
Yeah, they are a little ... because the second one comes up quicker than you would think. So it's April 15th and then June 15th, all of a sudden it comes up after that. And then kind of gets on a little farther out with September 15th. And then all the way back to January 15th for the last one.

Jarrod Bridgeman:
Okay, all right. Wow.

Steve Levy:
Yeah.

Jarrod Bridgeman:
That makes sense.

Steve Levy:
Yeah.

Jarrod Bridgeman:
Makes sense to me.

Steve Levy:
It's a little bizarre. One caveat on that is the pass-through entity tax, some states want your fourth one by December 15th. So those first three are generally what we expect, but then sometimes that last one they want a little earlier.

Jarrod Bridgeman:
So again, Google or look up what your state's rules for that or their recommendations.

Steve Levy:
Yeah, but definitely monitor things over the year versus just take what you get for your four voucher system. Because your year is going to be different. And like you said, you want to avoid those tax surprises.

Jarrod Bridgeman:
If you have a CPA right now that you use for your firm and you're not really hearing much each quarter about these things, this is something you should be reaching out for, right?

Steve Levy:
Yeah. Speak with them, saying, "Hey, here's my financials, can you give me a projection of what my tax situation might look like?" Because that would be a nice proactive way to have that communication each quarter on that.

Jarrod Bridgeman:
Okay, all right. And that way, again, you're not given the government some free money to hold onto for a while or you're not setting yourself up for a big tax bomb later.

Steve Levy:
Exactly, yeah.

Jarrod Bridgeman:
Yeah. Steve-

Steve Levy:
No one likes those.

Jarrod Bridgeman:
All right. Steve, anything else you'd like to say before we wrap up?

Steve Levy:
No.

Jarrod Bridgeman:
You want to sing us a little ditty?

Steve Levy:
Not at the moment.

Jarrod Bridgeman:
Some P. Diddy? No, that's probably not what you wanted to do right now.

Steve Levy:
No. No comment.

Jarrod Bridgeman:
Steve, thank you so much for being here today, I really appreciate you. Folks, if you're looking to get more information on how a company like us can help with tax estimates, investing, all kinds of different things and you want to learn a little bit more, go to fourquadrantsadvisory.com/events. We've got events coming up in Detroit, we're going to be in Grand Rapids, San Francisco, Lafayette, California. We're also going to be in the Philadelphia area soon, Dallas and Austin, all kinds of places. So please, please, please join us. It's Casey and his team do a really great job of presenting and usually we've got bourbon and food, and other fun things too.

Steve Levy:
Fantastic.

Jarrod Bridgeman:
And it's free CE.

Steve Levy:
Who?

Jarrod Bridgeman:
Like, you know-

Steve Levy:
Drinking and CE.

Jarrod Bridgeman:
Yeah.

Steve Levy:
Fantastic.

Jarrod Bridgeman:
Perfect. Thanks Steve.

Steve Levy:
All right, thanks.

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.