Charles Blair, DDS
John McGill, MBA, CPA, JD
My CPA advised me to incorporate my general dental practice as a Subchapter S corporation. I thought retirement-plan options were identical, whether or not a doctor is incorporated. Is my CPA doing this just to get higher accounting fees?
Probably not. You are correct in pointing out that there is virtually no difference in deductibility of retirement-plan contributions and fringe-benefit programs, regardless of whether you are unincorporated or operating as a Subchapter S corporation. How ever, there are substantial differences in the amount of payroll taxes you'll pay. When unincorporated, all of your net earnings from employment (as calculated on Schedule C) are subject to self-employment tax. The initial $84,900 is subject to Social Security taxes in 2002, with the balance subject to the Medicare payroll tax (2.9 percent).
But Subchapter S doctors have several ways to reduce their taxable income from the practice. Amounts paid out of a Subchapter S corporation to the doctor for building rent and equipment rent are not subject to payroll taxes. Likewise, contributions made on behalf of the doctor to a qualified retirement plan are free from payroll taxes. Since this deduction is not allowed on Schedule C, unincorporated doctors must pay payroll taxes. Finally, Subchapter S doctors can remove a portion of their profits in the form of a dividend, rather than salary. While dividends are subject to federal and state income taxes, they are not subject to payroll taxes.
Operating as a Subchapter S corporation can result in significant payroll tax savings, particularly for high-income doctors. Where the payroll taxes saved exceed the additional after-tax cost of operating as a corporation, Subchapter S incorporation makes economic sense.
My practice has used a car for business purposes for several years. My CPA recommends that I calculate the deduction using the mileage rate, rather than keeping track of actual expenses. Is this the best approach?
Probably not. In most cases, doctors can substantially increase their business-car deductions by paying all of the vehicle's operating costs through the practice and deducting the actual cost of operation, rather than the 36.5-cent mileage rate.
Auto expenses that should be paid through the practice include gas, oil, maintenance, repairs, property taxes, tags, licenses, and insurance. Since total business-car deduction includes depreciation on the cost of the car in addition to these items, most doctors end up with a larger deduction than when utilizing the mileage rate.
My wife has worked as an employee in my practice for many years. She does a variety of duties - marketing, bookkeeping, payroll, and other managerial tasks. While the true value of her services is much higher, I have been paying her only $3,000 per year, in order to minimize federal and state payroll taxes. Because of several tax-law changes, I understand that I should be paying my wife a higher salary. If my practice operates a 401(k) profit-sharing plan, how much should I pay my wife?
As a result of the 2001 Tax Act, the proper salary to pay an employed spouse has changed. We recommend that you have your spouse perform services valued at $15,000 annually and pay her at this rate. This will allow her to generate the maximum salary deferral into the 401(k) profit-sharing plan, assuming that she meets the eligibility requirements. The maximum 401(k) salary deferral is $11,000 in 2002, increasing by $1,000 per year thereafter until it reaches a maximum of $15,000 in 2006. This will also qualify your spouse for other practice fringe benefits, including fully deductible travel, and for the maximum child-care tax credit, if applicable, while minimizing federal and state payroll taxes.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration.
John McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.