Most taxpayers don’t need to spend too much time worrying about being audited by the Internal Revenue Service. However, many dentists are both small business owners and high wage earners, which means they may be more likely to hear from the tax man.
Download the 2020 Small Business Tax Calendar [PDF]
In its latest annual report, the IRS says it sent more than two million notices for math errors alone, so filers may want to carve out a few minutes at the beginning of the year to make sure they are making things easy for their accountant and reducing the risk of an audit.
Here are seven tips for your consideration. Before diving in, remember that you should consult a tax professional for any specific questions or if need personalized advice about how to get ready for tax time:
- Get organized to avoid mistakes. Start out by pulling everything together. It’ll be much easier now than when 2018 is a distant memory next March. Double-check the accuracy of any forms you’ve already filed (like Form 941), looking for typos and math mistakes. Make sure to confirm the accuracy of EIN numbers, social security numbers, and anything else the IRS might use to identify you or your employees. And when you’re done, move all your forms, invoices and receipts into the same place — whether it’s online or a physical folder — so you’ll be ready for tax time.
- Document meals and travel expenses. There can sometimes be a blurry line between business and personal expenses, but this year you should take care to make the distinction as sharp as possible. The Tax Cuts and Jobs Act of 2017 eliminated many dentists’ ability to write off entertainment expenses, and it reduced the deduction for most business meals to 50 percent. Be prepared for the IRS to heavily scrutinize write-offs for these types of expenses for 2018. That means keeping receipts and creating expense reports will be more important than ever, and moving personal expenses onto your books will be riskier.
- Avoid excessive or underutilized deductions. Do you have vehicle expenses, adoption credits or home office deductions? Claiming excessive or unrealistic deductions (especially when they’re disproportionate to your income or other expenses claimed by members of the dental profession) can also attract IRS attention. You’ll also want to make sure your deductions are be backed up by proper documentation.
- Document large charitable donations. Charitable donations are great for your community, and they can result in significant tax deductions. However, if your donations seem too big for your income bracket, the IRS is likely to take a closer look. Keep good records of your charitable donations, and if you’re going to claim non-cash deductions over $500, be sure you file a Form 8283. Also, be careful about whether you classify charitable donations as personal or business write-offs. There are a number of limitations and special requirements for different types of business entities.
- Be prepared for W-2s and 1099s. You pay and withhold taxes from your staff all year. In January, you’ll need to provide all your hygienists, office managers and technicians with the tax forms that form the basis of their own tax filings.
- Switch software providers. If you are considering changing software providers, January is usually the best time to switch. That means it’s worth taking some time to think about any pain points you may have experienced and consider what you really need from your accounting, payroll, benefits and human resources tools. Switching at the beginning of the year will simplify things when you plan for tax time next year because you won’t have to pull together data and financials from two different tools.
- Get ready for ERISA compliance tests: Do you offer a retirement plan? This isn’t exactly a tax tip, but smaller practices sometimes run into compliance problems with 401(k)s and other retirement benefits. If one or two highly compensated employees contribute a lot more than the rest of the team, it’s quite likely your plan will fail one of several nondiscrimination tests, so you may want to remind eligible employees to participate.
When you take a few proactive steps to get your practice’s finances in shape, tax season can wind up being the most wonderful time of the year. Seriously! You’ll be free to do more of what you enjoy (and spend less time going back and forth with your accountant or the IRS).
And if you are subject to an audit, know that you’re one of the 1.1 million Americans each year who’s in the same boat. Things will work out. Start by reviewing this guidance from the IRS to get a handle on common questions. Then consult with your accountant to make sure that you’re calm, collected and organized. You may also want to check to see if any of your other service providers offer to help with tax problems. For example, our company, OnPay offers an error-free guarantee, which means we’ll help deal with IRS notices if there are problems with your payroll taxes.
This material is educational only and reflects the opinions of the author. It is not meant to constitute legal or tax advice. Always contact a qualified tax professional or other financial legal advisor in your area for complete tax or legal advice.
Mr. McKee is president and chief operating officer for OnPay, a small business payroll, benefits and human resources company endorsed by ADA Member Advantage. His information is provided courtesy of OnPay. Learn more about how OnPay helps dentists at onpay.com/ADA or call 877.328.6505.