Strategic Business Structure & QBI Optimization for Dentists

BUSINESS STRUCTURE

As a Dentist, choosing the right business structure and leveraging the Qualified Business Income (QBI) deduction can be powerful tools for reducing your tax liabilities. In this article, we will explore a strategic business structure optimization strategy paired with the QBI deduction specifically tailored for Dentists. By implementing these approaches, you can unlock significant tax savings while maximizing your profitability.

Professional Corporation (PC)

So, when it comes to your business structure, you’ve got a few options. One popular choice is a Professional Corporation (PC) as it offers quite a reasonable 21% flat tax rate. It does not only protect your personal assets but also offers some neat tax advantages. You can structure your income as a mix of a reasonable salary and qualified dividends. Dividends are unfortunately subject to double taxation but in some situations can still be beneficial when the mix is properly structured. This helps you lower those pesky self-employment taxes and be more tax efficient. Oh, and don’t forget about retirement contributions and personal medical expenses! Which can be both paid by your business, which then reduces your taxable income.

LIMITED LIABILITY COMPANY (LLC)

Another option is a limited liability company (LLC). It’s like a partnership but with personal liability protection. The cool thing about an LLC is that it has pass-through taxation. What that means is that your business income passes through to your personal tax return. And that’s where the magic happens: you can enjoy the Qualified Business Income (QBI) deduction. This deduction lets you deduct up to 20% of your qualified business income, which is like making the first 20% of your business income tax-free! Pretty sweet, right? Plus, with an LLC, you have more flexibility in how you allocate profits and losses among the members, giving you some room for tax planning based on individual tax brackets. One downside is paying 15.3% self-employment tax on 100% of your net income. But don’t worry, read on and see what you can do about it!

LLC TAXED AS AN S-CORPORATION

Now, let’s talk about an LLC taxed as an S Corporation. It combines the best of both worlds. You get the flexibility of an LLC and the tax advantages of an S Corporation. The real winner here is the potential for tax savings. Unlike a regular C Corporation that faces double taxation, an S Corporation is a pass-through entity. That means the income and losses “pass through” to your personal tax returns, so you only get taxed once. And the best is that you can minimize those self- employment taxes by paying yourself a reasonable salary and taking the remaining income as an Owner’s Draw. The salary gets hit by self-employment taxes, but the dividends don’t. That’s more money in your pocket! Did I mention that this structure also makes you eligible for QBI deduction where the first 20% of your gross sales are tax free?

ADD A CHERRY ON THE CAKE

Let’s add the cherry on the cake and move on to the QBI deduction. It’s a fantastic provision for business owners. This deduction lets you deduct up to 20% of qualified business income. Basically, it’s like getting a 20% discount on your business income (first 20% of your Net Income is Tax Free!). Just take note of some exclusions for certain types of businesses.

There are a couple of tricks to maximize the QBI deduction. If you have employees, paying reasonable wages can boost the deduction. You can deduct the lesser of 20% of your QBI or of the wages you pay. So, paying fair wages not only keeps your employees happy but also helps you save on taxes.

By choosing the right business structure and taking advantage of the QBI deduction, you can save a ton on taxes as a Business Owner. It’s all about protecting your personal assets, optimizing your tax situation, and setting yourself up for long-term success.