How do I know when to elect S-corporation status for my practice?

The usual trigger is income high enough that the self-employment tax saved on distributions outweighs the payroll cost of paying yourself a reasonable salary. Many dentists pass that point years before they act on it. A review that models your specific income and compensation will show whether the election pays now.

Can I deduct a large imaging or CAD/CAM purchase in one year?

Expensing rules often let you deduct a substantial share of equipment cost in the year it is placed in service. Because the deduction lands in the year the asset is put to use, planning the purchase against your tax year — rather than by whenever the equipment happens to arrive — is what captures the benefit.

Should my associate be a contractor or an employee?

It depends on the facts of how the associate works, not on what is convenient. Classification in dentistry is examined closely, and an associate who is directed and scheduled like an employee generally is one. Getting this wrong creates retroactive payroll-tax liability, so it is worth settling deliberately.

Is it worth putting my practice building in a separate entity?

For many owners it is. Holding the real estate in a separate entity that leases to the practice can open cost segregation and separate an appreciating asset from clinical liability. The lease has to be written and priced at market, because related-party rent draws scrutiny.

Can I put my children on the payroll?

You can, where the work is real, age-appropriate, and paid at a reasonable rate for what is actually done. Documented hours and genuine tasks are what make it defensible. Paying a child for work that did not happen is the version that fails on examination.

Tax Strategy for Dental Practice Owners

Dental practice owners overpay most often through entity and compensation structure left unchanged since the practice opened, retirement plans sized for a much smaller income, and equipment purchases — chairs, imaging, CAD/CAM — timed by delivery date rather than by tax year. The three moves with the largest effect are usually an entity and compensation review, a defined benefit or cash balance plan, and equipment timing.

Key points

Dental income is high, steady, and concentrated in the owner, which is the profile that benefits most from a defined-benefit or cash-balance plan.
Lab fees, supply inventory, and continuing education are frequently misclassified in a dental practice, distorting both the tax result and the owner's sense of profitability.
Associate-dentist classification is a recurring examination issue, and an associate who is directed and scheduled like an employee generally is one.
Equipment expensing lands in the year the asset is placed in service, so a purchase should be planned against the tax year rather than the delivery date.
Putting a child on the practice payroll is defensible only where the work is real, age-appropriate, paid at a reasonable rate, and documented.

Why do businesses in this segment overpay?

Dental income is high, steady, and concentrated in the owner. That is precisely the profile that benefits most from a defined-benefit or cash-balance plan, and it is also the profile that most often still has only a small retirement plan in place. Many practices continue to operate as sole proprietorships or single-member LLCs for years after income crossed the point where an S-corporation election would have paid for itself.

Lab fees, supply inventory, and continuing education are frequently misclassified, which quietly distorts both the tax result and the owner's sense of profitability. Production versus collections is tracked carefully as a clinical matter but rarely reconciled as a financial one, so the numbers a tax plan should be built on are often wrong before any planning starts.

Which strategies matter most here?

Requires capital outlay

Some of the levers above need cash to fund; the others are elections, timing, and compensation design. A plan separates the two.

What does the IRS look at in this segment?

Owner-dentist reasonable compensation is a standing issue, as is personal use of practice-owned vehicles. Charitable dental work and discounts recorded without documentation are a common weak point, and lab and supply cost substantiation is tested more often than owners expect.

Associate-dentist classification — independent contractor versus employee — is a recurring examination issue in dentistry specifically. An associate who works like an employee but is paid as a contractor creates payroll-tax exposure that compounds with penalties and interest.

What changes as you grow?

A solo practice's questions are entity election, retirement plan sizing, and equipment timing. A multi-doctor practice adds partner compensation, buy-in and buy-out structure, and a management company where locations begin to multiply.

A group approaching the scale of a dental service organisation is a transaction-structuring conversation. That is the point at which practice valuation, clean books, and a sellable structure matter as much as the current-year tax result, because the exit is now the largest financial event on the horizon.

Common questions

How do I know when to elect S-corporation status for my practice?: The usual trigger is income high enough that the self-employment tax saved on distributions outweighs the payroll cost of paying yourself a reasonable salary. Many dentists pass that point years before they act on it. A review that models your specific income and compensation will show whether the election pays now.
Can I deduct a large imaging or CAD/CAM purchase in one year?: Expensing rules often let you deduct a substantial share of equipment cost in the year it is placed in service. Because the deduction lands in the year the asset is put to use, planning the purchase against your tax year — rather than by whenever the equipment happens to arrive — is what captures the benefit.
Should my associate be a contractor or an employee?: It depends on the facts of how the associate works, not on what is convenient. Classification in dentistry is examined closely, and an associate who is directed and scheduled like an employee generally is one. Getting this wrong creates retroactive payroll-tax liability, so it is worth settling deliberately.
Is it worth putting my practice building in a separate entity?: For many owners it is. Holding the real estate in a separate entity that leases to the practice can open cost segregation and separate an appreciating asset from clinical liability. The lease has to be written and priced at market, because related-party rent draws scrutiny.
Can I put my children on the payroll?: You can, where the work is real, age-appropriate, and paid at a reasonable rate for what is actually done. Documented hours and genuine tasks are what make it defensible. Paying a child for work that did not happen is the version that fails on examination.

Sources

Mena Hemaia, CPA, CIA

Chief Executive Officer, Accountack — West Palm Beach, Florida

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