New Kansas Deduction & Other Factors Will Impact Year-end Planning for Dental Practices
Keeping an Eye on Cash Flow Can Help Ride Out Potential Recession
Year-end planning for dental practices includes some new factors this year, including the need to pivot some financial management strategies to guard against a possible recession in 2023. But the news is not all bad, since Arkansas and Kansas created a new tax deduction that benefits owners of pass-through entities this year. Following are a few essential factors to consider as owners of dental practices turn to their year-end planning:
- Arkansas and Kansas ‘SALT’ parity legislation. The Arkansas and Kansas legislature joined more than 20 other states in enacting a measure to blunt the impact of the $10,000 cap on federal deductibility of state and local taxes (SALT), enacted in 2017 to the detriment of high-income taxpayers and those in high-tax states. Like other states, Arkansas and Kansas adopted a workaround allowing pass-through entities such as S corporations, partnerships and limited liability companies to elect to pay the state income tax due on a company’s income at the entity level, rather than the individual partners paying the tax proportionately on their person income tax returns. The individual receives an additional federal deduction through a reduction to their share of reportable income. And at the state level, the individual partners receive a credit on their Arkansas and Kansas tax returns for the state income tax paid by the pass-through entity on their behalf.
- Effective for the 2022 tax year, this workaround will significantly benefit members of pass-through entities whose high incomes no longer qualify them for the Section 199a Qualified Business Income deduction.
- For year-end planning purposes, dental practice owners should meet with their tax advisors well before the end of the year to discuss the impact on their state and federal taxes, so they can make any adjustments necessary in estimated tax payments.
- Focus on cash flow and real-time financial data. Understanding where you are and your income by Dec. 31 will enable you to make accurate estimated tax payments. You don’t want to leave money on the table or get caught short. If you only paid taxes on $100,000, and your income turns out to be $150,000, you will get a painful surprise on your tax returns. Having a discussion with your tax advisor and your accounting services provider before the end of the year can help you get a handle on your financial data and avoid unpleasant surprises.
- Capital expenditures and bonus depreciation. After holding steady at 100% for several years, bonus depreciation will be dialed back to 80% in 2023 and will be phased out gradually until it is gone in 2027. Dental practices considering large equipment purchases may want to act before the end of this year to take advantage of 100% depreciation. But weigh the depreciation against borrowing costs if you don’t have cash on hand for a purchase since interest rates are rising rapidly. Talk to your financial and tax advisors before making a large purchase.
- Employee Retention Tax Credit. Most practitioners have already maxed out their ERTC claims, but if you think you may have some capacity left in your eligibility, now is the time to talk with your tax advisor about filing amended Form 941 returns.
- Possible recession and economic uncertainty. Economists differ as to whether the U.S. is headed into a recession, and whether it will be a shallow or deep recession if it happens. The uncertainty, combined with continuing supply chain problems, labor market woes and unprecedented inflation is upending the stock market and making business owners jittery. It’s an excellent time to evaluate your current cash flow and create a cash flow forecast based on your real-time financial data and marketplace trends. Keeping a healthy amount of cash on hand and reining in costs will help you ride out a recession with minimal damage.
- Consider a cost segregation study. For dental practices that own their facilities, a cost segregation study can be an important tax-saving strategy to help free up needed cash. This can help finance equipment purchases and in the long run, help ride out a protracted recession. Read about how a cost segregation can help business owners fight inflation.
- Tighten up collectability of patient fees. As of this year, credit reporting agencies are no longer including most medical debt when calculating credit scores. So, the collectability of patient payments is becoming more critical, particularly with the potential for a recession. Ensure your front desk team understands they must collect copays and coinsurance as quickly as possible.
- Update employee benefits packages. Many employee benefits packages renew on Jan. 1, so now is an excellent time to review the benefits you provide and communicate their value to your employees to boost participation. Employees may also want to make changes in their coverages at this time.
There may still be opportunities to adjust your tax plan and save money. Each dental practice has its own needs, so weigh all potential options carefully. Contact your Adams Brown advisor to discuss these and other year-end financial management strategies that can benefit your dental practice.