If you own multiple dental practices, you likely have very little time to yourself. Between clinical care, leading your team, and managing your business, it can be difficult to prioritize certain important tasks, such as business and personal tax reduction planning.
What I’ve found is that many business owners end up working harder and much less efficiently than they need to, especially when it comes to some of the benefits they can achieve through effective tax reduction planning.
Generally, the reason this occurs is because they don’t have a plan to reduce their tax liability or the support to execute a plan to minimize what they need to send to the IRS. Additionally, because they haven’t considered their long-term tax strategy, they end up with higher tax obligations, giving more money to the IRS than they need to.
The truth is, effective tax planning doesn’t need to take a lot of time. It just takes a little bit of focused attention and effort led by someone who understands your world and the tax reduction options you have available.
Here’s a process I recommend you use to free up both time and money, and, of course, typically lower how much money they need to send to the IRS. A proactive tax advisor can walk you through these steps very efficiently to make sure you get the best bite at the tax apple each and every year.
1. Establish a Solid Financial Foundation
The first step involves making a mental shift, if you haven’t already. Some dentists don’t think of their multiple practices as one business with themselves as the CEO (and, most probably, CFO) of that business. The multi-practice owner is responsible and accountable for the net income of the business, which includes sub-disciplines such as tax strategy.
Create both a personal and business balance sheet to track your assets and liabilities. Many times, significant tax savings can be found simply by understanding your assets and liabilities.
Next, develop a cash flow statement that lists every source of income and expense. This will clarify where your money goes, how much free cash flow you have, and how much you can take out of your business. Together with the balance sheet, it also gives you and the professionals you work with the material they need to begin to give you informed options.
2. Make Sure the Four Core Disciplines Work in Harmony
The four core disciplines of wealth management are as follows: tax strategy, risk management, wealth planning, and investments. It’s important for whichever professionals you use to help with these disciplines to work together and communicate—or perhaps be a part of the same firm.
This enables everyone to be on the same page, so that your tax reduction planning can be executed in all critical areas. To sum up, don’t put your tax reduction planning in a silo, but rather think of it as one aspect of your overall wealth management strategy.
3. Incorporate Regular Tax Reduction Planning Meetings
A tax reduction planning meeting is exactly what it sounds like: A regular meeting with a tax expert centered on lowering your tax obligations and making them fit within your overall wealth management strategy. Ideally, these should occur multiple times a year.
With our clients, we prefer to initiate our tax reduction planning as early as June 1st, by holding the first tax reduction planning meeting. If needed, we meet again later in the year to update the client on what we have implemented.
4. Identify Your Options
Many dentists—and taxpayers in general—are unaware of the options they have when it comes to the four core disciplines of wealth management: tax strategy, risk management, wealth planning, and investments. For example, certain sophisticated retirement plans can keep more money out of taxable income from year to year, while others increase taxable income but have partially or fully tax-free distributions.
You have tax-advantaged options for retirement savings beyond the typical 401(k) that many business owners don’t take advantage of. Make sure you take the time to educate yourself about the options that fit with your retirement and tax strategy.
5. Implement Strategies That Work in Your World
Lastly, remember that you are a business owner. You’re the CEO. This means you’re an expert at making decisions. Be weary of an advisor who wants to force you into one box or sell you on a one-size-fits-all solution.
As you begin formulating your tax plan, you will begin to see nuanced approaches that can help you even more. Make sure that the professionals you work with understand your world and contextualize solutions that fit.
Your Next Step: Get Started as Soon as You Can
Because tax planning is truly a year-round process, best practices ideally begin a few months after you file your annual taxes.
However, although it can be easy to feel the temptation to “wait until next year” if you didn’t start planning a few months after you file your taxes, the rule of thumb is the sooner you start the better your results will be.P.J. DiNuzzo is the Founder, President, and Lead Consultant of DiNuzzo Middle-Market Family Office. He is a specialist who coordinates a team of experts to create strategic tax, risk, cash-flow, and lifestyle options for successful privately-held business owners. He and his team excel in giving successful middle-market business owners a level of service typically only enjoyed by ultra-wealthy families served through single-family offices.