President Donald Trump signed the biggest tax reform bill in more than 30 years on December 22, 2017. But how will this impact your practice? While most of the changes in the tax code will not impact your practice until you file your 2018 taxes, preparing for these major changes can help your practice thrive.
Tax law changes for practice owners
Bassim Michael, CPA, CVA.Practice and business owners will see massive changes to their 2018 taxes whether the practice is a C corporation, an S corporation, or a partnership. For a C corporation, any profits are taxed separately from its owners under subchapter C of the U.S. Internal Revenue Code, while for an S corporation, the profits are passed on to the shareholders and are taxed based on personal returns.
For instance, those whose practice is a C corporation will see their tax rate reduced from 35% to 21%. For practitioners who practice as sole proprietors, partnerships, or S corporations, there will be a deduction of up to 20% from qualified business income for individuals with taxable income below certain thresholds ($315,000 for joint filers and $157,500 for all others) for 2018.
For business income derived from professional services, the deduction will be lost entirely for service businesses when a taxpayer's taxable income is above the top of the phase-out range ($415,000 for joint filers and $207,500 for all others).
7 relevant changes
The tax code reform also includes the following important changes affecting business and practices:
- Bonus depreciation is increased from 50% to 100% on qualified property placed in service after September 27, 2017, and before January 1, 2023. The new provision includes new and used qualified property.
- The Section 179 limit is increased to $1 million, up from $500,000 under the old law.
- The domestic production activities deduction was repealed in the latest law. This deduction was available to dentists who were manufacturing crowns and dental appliances in their office.
- If you drive a luxury car exclusively for business, the depreciation limitation will be increased for those placed in service after December 31, 2017. The maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
- Entertainment expenses will no longer be deductible. Business meals will remain 50% deductible.
- Like-kind exchanges will only be limited to real property. For example, if a dentist sells an office building, he or she can exchange the office building for an apartment building and defer the gain. If they trade in a car for a new car, under the new law, they would not be able to do a like-kind exchange. Instead, they would have to recognize the gain on the sale of their old vehicle.
- The deduction for qualified transportation fringes will no longer be deductible.
Please keep in mind that this is just a brief summary of the major provisions of the new tax law, and you should consult with your tax advisor to see how the new law applies to your practice and you.
Bassim Michael is a certified public accountant (CPA), a certified valuation analyst (CVA), and the founder and president of Only for Dentists, a company that provides tax reduction, dental accounting, and additional services to dental practices.
Disclaimer: The comments in this article are not meant to be taken as financial or tax advice. DrBicuspid.com and Only for Dentists recommend that you always consult with your financial and tax planner before making any significant changes in your financial situation.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
