An overview of the Tax Cuts and Jobs Act of 2017 for dentists and dental practices

How will the passage of the Tax Cuts and Jobs Act (TCJA) of 2017 affect dentists and dental practices? Get answers in this review by Allen M. Schiff, CFE, CPA.

Jun 1st, 2018
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Allen M. Schiff, CFE, CPA

With the passage of the Tax Cuts and Jobs Act of 2017, I would like to share with you the latest changes for income taxes and business taxes, our understanding of the changes, and how the changes will impact you from now through 2025.




Editor’s note: Mr. Schiff will be lecturing at the annual Dental Economics Principles of Practice Management Conference, which is scheduled to be held in Indianapolis, Indiana, on July 12 and 13, 2018. For registration info, please visit principlesofpracticemgmt.com.




We will start with the major tax provisions for individuals. Please note that individual tax changes are currently set to expire after 2025. Unless extended, after 2025 the provisions will revert back to 2017 law. The business tax cuts have been made permanent.

Individual income tax rates

A major change under the new tax bill is a reduction of individual income tax rates. The seven tax bracket system remains in effect, but most of the rates have been reduced. Table 1 gives rates for specific income brackets and filing statuses.

Table 1: Individual income tax rates 2018–2025

Single taxpayers

Taxable income over

but not over

is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

37%

Heads of households

Taxable income over

but not over

is taxed at

$0

$13,600

10%

$13,600

$51,800

12%

$51,800

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

37%

Surviving spouses and married taxpayers filing joint returns

Taxable income over

but not over

is taxed at

$0

$19,050

10%

$19,050

$77,400

12%

$77,400

$165,000

22%

$165,000

$315,000

24%

$315,000

$400,000

32%

$400,000

$600,000

35%

$600,000

37%

Standard deduction

The next major change is the combining of the standard deduction and personal exemption. The standard deduction has almost doubled for those filing singly, going from $6,300 to $12,000. It is $18,000 for those filing as head of household and $24,000 for married taxpayers filing joint returns. The personal exemption was eliminated moving forward as a result of the increased standard deduction.

Previously, one personal exemption equated to $4,050 per family member. For example, a husband and wife with two children could claim either $16,200 in personal exemptions in addition to their standard deduction of $12,700, or they could claim their itemized deductions—whichever was higher. But under the new law, the most a family can claim under the standard deduction is $24,000 if filing jointly, regardless of the number of exemptions.

Itemized deductions

Under the new law, far fewer Americans are expected to itemize their deductions. The reason is that more taxpayers will benefit from the increase of the standard deduction. The following itemized deductions were changed or repealed:

State and local tax deduction

There is a new limitation of $10,000 annually. For 2018 and beyond, taxpayers can deduct their combined state and local income taxes, real estate taxes, and personal property taxes up to $10,000 a year.

Mortgage interest limitation

Under the new tax law, a mortgage established prior to December 15, 2017, would retain a mortgage interest limitation of $1 million. For mortgages taken out after December 15, 2017, the mortgage interest deduction on acquisition indebtedness will be limited to $750,000.

For 2018 and beyond, you can no longer deduct a home equity loan unless very technical criteria are met. Consult with your dental CPA for these criteria.

Medical expenses

For 2018, the medical expense itemized deduction has been reduced to a new threshold: the amount above 7.5% of adjusted gross income (AGI). The threshold will increase to 10% of AGI from 2019 through 2025.

Other miscellaneous itemized deductions

Beginning in 2018, tax preparation fees, investment advisory fees, unreimbursed employee business expenses, and safe deposit box fees are no longer tax deductible. This provision of the new tax bill includes all miscellaneous itemized deductions that were subject to the former 2% AGI limitation.

The Pease limitation repeal

For 2018 and beyond, the new tax bill eliminates the so-called Pease limitation on itemized deductions. The limitation previously reduced allowable itemized deductions by 3% AGI once taxpayer income exceeded a certain threshold (previously $261,500 for single filers and $313,800 for joint returns). Eliminating this limitation provides for an additional tax rate reduction for high-income earners.

Alternative Minimum Tax

For 2018 and beyond, the Alternative Minimum Tax (AMT) exemption was increased from $55,400 to $70,300 for single filers. For joint returns, it was increased from $86,200 to $109,400. The number of taxpayers subject to AMT in the future will decrease significantly as a result of the increase.

Child tax credit

The new tax bill has increased the child tax credit to $2,000 per qualifying child—up from $1,000 in 2017. In addition, up to $1,400 of the child tax credit can be refundable if your net tax liability is reduced to zero by the credit.

It is hoped that the expansion of the child tax credit will generate additional tax savings that may have been lost due to the elimination of the personal exemptions for families.

In order to qualify for the tax credit, the income limitations have been increased significantly to $200,000 for individuals and $400,000 for married couples.

529 college savings plans

If you have a 529 college savings plan, the distributions can now be used to pay for up to $10,000 per student per year for private elementary and secondary school expenses (grades K-12). Keep in mind, however, that this is a state tax deduction. In addition, if your state limits you to a deduction of $2,500 per year per plan, you may want to consider several 529 investment plans per child in order to maximize the 529 deduction.

Future year-end planning techniques

In the future, you may lose the benefit of itemizing your deductions due to the increased standard deduction. If this is the case, you may want to bunch charitable deductions together in any given year to generate a higher itemized deduction in excess of the standard deduction for that particular year.

As a result of the new tax law, you may lose itemized deductions subject to the 2% AGI floor. If this is the case, you may want to consider paying your investment advisory fees directly out of your dental practice or your business retirement accounts. Please consult with your financial advisor to determine if this strategy is right for you.

Business income taxes

Corporate tax rate

The corporate tax rate for C corporations has been reduced from 35% to 21%. Despite the lower tax rate, I still would not consider placing a dental practice into a C corporation entity. This is because doing so would lead to so-called double taxation. To explain, if you leave profits in a C corporation, you can only get them out one of two ways: as a bonus salary check or by declaring a dividend. In either event, you will first pay taxes at the C corporation level (21%) and again when you are taxed at your individual tax rate.

The new 20% pass-through income deduction

Beginning January 1, 2018, and continuing to December 31, 2025, individual dentists will be allowed to deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. These pass-through entities will be allowed to deduct 20% of qualified business income before computing tax liability. Essentially, this means that pass-through businesses will only be taxed on 80% of their pass-through income.

The definition of qualified business income is the net amount of qualified income, gains, deductions, and losses with respect to the qualified trade or business of the taxpayer. These aforementioned attributes must be connected with the conduct of a trade or business within the United States.

Note: there is a limitation on the 20% deduction—it is disallowed for specified service trades or businesses with income above a threshold. Specified service trades include trades or businesses in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, and others where the principal asset of the business is the reputation or skill of one or more employees. It does not include architecture or engineering. So, yes, the limitation applies to dentistry!

The specified service business limitation will apply to dentists whose taxable income exceeds the threshold of $157,500 filing singly and $315,000 filing jointly. If you are a dentist, file a joint return, and your total taxable income is less than $315,000, then you are able to take the 20% deduction of pass-through income. The thresholds phase out over the next $50,000 of income for single filers and $100,000 for those filing jointly. If the taxable income is above $207,500 for those filing singly or $415,000 for married filing jointly, then they are completely phased out of the reduced pass-through rate.

If your taxable income is between $157,500 and $207,500 filing singly or between $315,000 and $415,000 married filing jointly, there are additional limitations on how you arrive at the 20% deduction. See Figure 1 for an example.

Figure 1: Phaseout of the 20% pass-through income deduction

The 20% pass-through income deduction phases out between taxable income of $157,500 and $207,500 filing singly and between $315,000 and $415,000 filing jointly. A qualified business income deduction cannot exceed 20% and is limited to the greater of the following two limitations:

  • 50% of wages paid and reported to the US Social Security Administration (SSA) in 2018

  • 2.5% of the cost basis of depreciable assets plus 25% of wages paid and reported to the SSA during 2018

Example:You are married, file a joint income tax return, and operate your dental practice as a sole proprietorship. In 2018, you have taxable income of $345,000. Your dental practice earned $345,000 and also paid $100,000 in 2018 W-2 wages to all of your employees.

The $345,000 in taxable income is above the threshold by $30,000 ($345,000 - $315,000). That $30,000 is 30% of the $100,000 phaseout range ($30,000 / $100,000 = 30%). You calculate your new pass-through income deduction by taking the lesser of:

  • $48,300 ($345,000 taxable income x 70% threshold remaining x 20% rate)

  • $35,000 ($100,000 2018 W-2 wages x 70% threshold remaining x 50% rate)

Your new 20% pass-through income deduction is $35,000 (the lesser of $48,300 and $35,000). Be sure to consult with your dental CPA on this complex computation.


Business depreciation: Section 179 expensing

For 2018 and beyond, Section 179 depreciation expensing limits have been raised to $1 million—up from $500,000 per year—with a spending-cap phaseout starting at $2.5 million of equipment purchased in a given year.

Business depreciation: 50% bonus depreciation is now 100%

Bonus depreciation prior to September 27, 2017, was 50%. Bonus depreciation goes to 100% subsequent to September 27, 2017, for both new and used property acquired. Bonus depreciation is mandatory. This means you must attach an election to your income tax return to opt out of bonus depreciation. This election is by class of asset, whereas Section 179 is by specific asset.

Automobile depreciation

Under the new tax law and beginning in 2018, business vehicle depreciation has increased significantly. The previous tax law limited the deductibility of depreciation for automobiles that were considered luxury vehicles. The maximum amount of allowable depreciation has increased to:

  • $10,000 for the year in which the vehicle is placed in service (previously $3,160)


  • $16,000 for the second year (previously $5,100)


  • $9,600 for the third year (previously $3,050)


  • $5,760 for the fourth and later years in the recovery period (previously $1,875)


As a result of this drastic change in tax law, it may make purchasing an automobile a more appealing option than leasing an automobile for tax purposes.

Business entertainment expenses

Under the new tax law and beginning in 2018, expenses incurred for entertainment, recreation, or amusement will be disallowed—even if they are business-related expenses. This includes tickets to sporting events. Business expenses for food and beverages will still be allowed but subject to the 50% deduction limitation.

Domestic production activity deduction

If you use CAD/CAM dentistry in your office, you previously were allowed to take a deduction for domestic production costs. For tax years beginning after December 31, 2017, the domestic production activity deduction is repealed.

As you can readily see, the new tax law has complex changes. As of the date of this writing, the dental CPAs within the Academy of Dental CPAs are studying all aspects of the law in order to formulate an opinion as an organization. We are doing so in a proactive way to help our clients reduce their future tax liabilities.

Author's note:In order to locate a dental CPA near you, visit adcpa.org and click on “Find a member.”


Allen M. Schiff, CFE, CPA, is the president of the Academy of Dental CPAs (adcpa.org). The ADCPA is currently comprised of 26 dental CPA firms representing more than 9,000 dental practices. Mr. Schiff enjoys lecturing on all subjects relating to dental practice management, especially those revolving around taxation, practice transitions, profitability, overhead, wealth accumulation, cash flows, and budgeting. He is currently the managing member of Schiff Dental CPAs (schiffcpa.com). He can be reached at aschiff@schiffcpa.com or (410) 321-7707.

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