Taxes 101 for Dentists: Which Entity Structure Is Best For Your Practice? – Episode #696

On the third episode of a 5-part tax series of the Dentist Money Show, Tom Whalen, CPA joins Matt to explain how to choose the right entity structure for your dental practice. They discuss why understanding the implication of an S-Corp election is important, highlighting the most common mistakes dentists make—and how to avoid them. They review the critical role of tax allocation and how to pay yourself a reasonable wage. If you missed the last two episodes of the tax series you can find them here!

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Year-End Tax Planning Checklist for Dentists

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Podcast Transcript

Matt Mulcock: Welcome to the Dentist Money Show where we have Dentist make smart financial decisions. am Matt and I’m joined again with tax master flex, Tom Whalen. just made that up on the spot. Tom, how are you? I literally just didn’t, it was not even thinking. I was like, I’m just going to go with what comes from my heart and tax master flex came out. Does that feel okay? Okay. ⁓ well we’re excited to be, joining forces again.

Tom Whalen: I’m doing well. How are you? Good to be back. Good to be back. I’m okay with it. I’m okay with it. Yep, that works. Coin it.

Matt Mulcock: as we mentioned on the, for the tax series. So this is episode three. as we mentioned, the very first episode, if you have not heard the first two, we, highly recommend going back and listening to those. We’re, trying something kind of new on the Dentist money show where we’re kind of going to start doing these series and grouping kind of, kind of bigger topics into these series more intentionally rather than what we, what oftentimes will happen. Tom will where Ryan and I’ll just start yapping and beg, we should do a part two. We’re trying to get more intentional here, but this is, this is episode three of the tax series. So we’re trying to build upon these things. And today we’re talking all things entity structure and tax allocation. if that sentence didn’t make you fall asleep, I don’t know what will. Tom, how excited are you for this topic?

Tom Whalen: I’m so excited. will say one thing. I think that first episode in the series, was like the kind of like background, like just the basics. So I do think that’s a good one to listen to first. I don’t know that these, you know, two, three, four, five need to be played in any certain order, but I do think that first one’s a really good one to listen to first. So a little plug for you there.

Matt Mulcock: Yeah. Yeah, thank you. think it’s a good point. We, did try, we are trying to build upon them, but I, we’re also trying to keep them somewhat standalone where if you’re just popping in and listening to one, you’re still getting something out of it. But I do think the first one we were trying to do our best to lay the foundation. So, so today talking all, again, all things entity structuring and tax allocation. So where this kind of came from, Tom, as we were thinking, as I was thinking about this and kind of laying out the outline. And as we were talking about this, was thinking about a particular client who a couple of years ago did a startup and was scratch startup. And scratch startup. were, they were about 12. I can’t remember the exact time, but as a, let’s say it’s about 12, it was somewhere between 12 months into the startup. When they, when they came to us.

Tom Whalen: Let’s crash start up.

Matt Mulcock: And so really early on big investment into the practice, obviously to get it started. So I think they had just started year two when they hired us. And, one of the first things is we went through among a ton of other things, but one of the first things we look at on the tax side is, entity structure and just kind of like what, and not that, you know, us specifically now we have obviously tax and accounting with you guys, but even at the time, we still like to bring this up and collaborate with CPAs and all that. So, looked at her tax allocation and her entity structuring. And I noticed, and she actually had brought this up. She’s like, I’m a little confused by this. We elected S corp in year two. And I was like, that’s interesting. Like let’s dig into that more. Yeah, exactly. Exactly. So I was like, you must be killing it. So anyway, long story short, we come to find out she was not.

Tom Whalen: Are you making loads of money already?

Matt Mulcock: necessarily killing it, which most startups don’t in year two, she actually had a very significant, depreciation, know, massive, massive depreciation. We’re talking hundreds of thousands of dollars in losses or depreciation. She could show and she elected S corp. And, we’ll get into this of why this is a problem, but it was a problem. And here was the biggest thing I wanted. Here’s kind of the biggest thing I wanted to bring up. I ended up getting on a call with her CPA because I was like, this is not right. Like this is going to screw up a lot of things for you. I got on with the CPA and started to understand his rationale behind this. And it became very evident that he had no rationale. He was checking boxes and just kind of, you know, just kind of flipping through clients and like, yeah, like let’s do this. He literally said to me, exact quote, when I said, tell me.

The rationale behind this, why did you elect S court for her in year two? And he said, because she’ll have to do it at some point anyway. So we might as well do it now. And I was honestly floored. I was like, that is the antithesis of tax planning. I was just like, because she has to do it anyway, what are we talking about?

Tom Whalen: Yeah, that’s tough. And then you hear it sometimes too, it’s like, like, I’m a dentist and a lot of dentists are S-corps, therefore I should be an S-corp. And that might be true, might be true today, might be true five years from now. We don’t know when that will be true, but that doesn’t mean that we have to do it right now or just because we’re to have to do it at some point doesn’t mean it has to be right now.

Matt Mulcock: Yeah. Yeah. It was, I was, I was honestly blown away by just the rationale alone or lack thereof. Yeah. And, it caused a lot of issues. And again, we’re going to break down, kind of where this, where these issues come up with this particular client. When we talk about this, or talk about entity structuring and tax allocation. So, I guess why this is so important, I think, I think, and Tom, you and I, before we hopped on,

Tom Whalen: Lack thereof.

Matt Mulcock: Agree to this or agree on this is that tax allocation and your entity structure is kind of an underrated part and can create a lot of underrated issues for practice owners. not doing this right.

Tom Whalen: For sure. You can save you a of money can cost you a lot of money and more than costing you money. It can create a lot of just like kind of cash pinches where it’s tough to access the money inside the business where without creating unnecessary tax burden. So yeah, it’s I think it’s very, underrated. And I think people think about it a lot early on. But then they just kind of go, yeah, we had that discussion a few years ago. We don’t need to do anything. like, no, this is something that we keep talking about as you go on in your practice.

Matt Mulcock: Yeah, exactly. And I think, I think what you said earlier is so perfect is that a lot of dentists just assume because of what’s kind of out there now in the dentist sphere of like, yeah, I just like to score. But I guess that’s what you do. And I think that’s what leads to lot of problems. So let’s, let’s take a step back for a moment and talk about, as we again, get more into the details of kind of the story that I told and how, and the different things that this can impact, but kind of what the things that any structure determines, like what’s attached to that, the ripple effects of getting your entity structure right.

Tom Whalen: Yeah, I think I want to be clear that there’s, there’s an entity structure set up for tax purposes, but also for legal purposes. So a lot of times people say, Hey, I’m an LLC and now I’m an S corp. It’s like LLC is if I started practice today and I set up an LLC, that is my legal structure. If I then elect S corp status, I am an LLC that is illegally, I’m legally an LLC that is taxed as an S corp. If I don’t.

Matt Mulcock: Yes.

Tom Whalen: Elect S status, I’m considered a sole proprietor for tax purposes. So LLC tax is a sole proprietor or LLC tax is an S corp, but no matter what, your legal status will always be LLC.

Matt Mulcock: I’m so glad you brought this up because this gets misconstrued and misunderstood for good reason. This is super complicated and confusing. I’m so glad you said that. I think, I think when we talk about this, people think S corp is an entity structure and it’s not, it’s a tax allocation.

Tom Whalen: And to further complicate things, there is an entity structure for legal purposes that’s considered a service corp or SC. That does not stand for S-Corp. You can be a service corp that’s taxed as a C-Corp, or can be a service corp taxed as an S-Corp. So a lot of times people think SC is S-Corp, and sometimes it but it’s not. It’s not from a legal perspective. So really understand that. Yeah, no kidding, right?

Matt Mulcock: Yeah. Yep. Really glad the government made this so straightforward crazy.

Tom Whalen: Now there are some states that require medical practitioners, dentists and all other sorts of medical providers to be a service corporation or a professional corp. Some states do not allow LLCs for medical practices, dentistry being within that umbrella. So in a state where you’re not allowed to be an LLC, then you might have to be a service corp and you might have to go to S corp day one.

I think this discussion today is, going to assume that we have the flexibility to make the decision. cause if we don’t, well, then it’s just not really relevant anyway, but as long as you can choose one or the other, it’s really, really important. Yeah. Understanding the differences, like what is a sole proprietor versus an S corp. And that can be an LLC as a partnership or all these things. So, there’s a lot of terminology, a lot of different tax statuses out there, different legal statuses. So getting it all on one kind of.

Matt Mulcock: Yeah, yeah.

Tom Whalen: Baseline level is, I think, good starting.

Matt Mulcock: Yeah, totally. And I think with that said, Tom, think if you take nothing else away from this discussion, it’s that it’s, I think it’s what you just kind of highlighted of this can be a really complicated B it’s really important to put a lot of thought and intention to this, early on. whether you’re acquiring your practice or doing a startup is to be thinking about this and having a CPA and having an accounting group that’s going to be helping you determine what makes the most sense for you.

Tom Whalen: Yep, for sure. I think, oops, sorry, go ahead.

Matt Mulcock: No, no, I was just thinking about the long-term implications and not even long-term short and midterm. Like if we do this now, here’s what it’s going to look like in the next couple of years. Here’s the impact this could have.

Tom Whalen: Bingo. And this really, I don’t want to oversimplify too much, but it comes down to profitability. Like what are we showing for taxable profits? And these are going to be a strong driver of the tax status we want to take. think a really, really common path is that people will start their business. They’ll create their LLC or their attorney will, and they will start off being taxed as a sole proprietor. And then you kind of. As profits ramp up and we get to a certain level of profits, depending on your marital status, then we eventually make that flip task core. But again, that might not be for three, four five years and doing it too early or too late, you know, has its impacts.

Matt Mulcock: Yeah, I’ve seen that. I see that too. And that’s normally the path that we encourage people to consider with their, their accounting team or their, their, their tax team. is that same exact thing? Can we look, I guess let’s just go there and talk about why is that the normal path? again, kind of, we’ll kind of like interweave all the different things that are, that are, impacted. What’s the ripple effect on these different aspects of your business or life? when it comes to electing. S Corp status versus not. I guess let’s just come back to the story that I told and break down. Why is it such a problem or what problems were created by her, by them electing S Corp so early in year two when she had no income.

Tom Whalen: Yeah. So a big difference from an S-Corp versus a sole proprietor is, especially in the startup world, because oftentimes there’s going to be a loss shown in the startup world. There’s a ton of depreciation, ton of interest, these big tax deductions that exist in year one, year two, et cetera. So we’re not showing much, if any, taxable profits now in the, we’ll say, sole proprietor world. Or sometimes the form that’s filed for that is a schedule C on your personal return. So if somebody says, Hey, I’m a schedule C or I’m a sole proprietor. That’s, want to just say, Hey, those are the same thing for this. In that sole proprietor schedule C world, you can use loans. So generally speaking, people aren’t funding their startups with cash. I think that’s a fair assumption. ⁓ Yeah. You can use those loans.

Matt Mulcock: Yeah. Yep. Yeah, pretty fair assumption.

Tom Whalen: To take deductions against. Now, what I mean by that is if I start up a practice and I’ve got 800 grand into this, but I put in terms of debt, I’ve got 800 grand of debt into this, but I have no dollars of my own. I put no money down. I can use those $800,000 of loan dollars as what’s called basis. So now if I have a $50,000 loss in year one, I can deduct that versus an S corporation. You cannot use loans. like bank loans to fund your losses and deduct them. You have to roll those losses forward to a new year. So right off the bat, if we’re showing losses and we can’t deduct them that like, like we are truly losing money, right. and we can’t deduct it’s like, there could be some tax ramifications, but we might not have the cash to pay the tax. Right. So that can create a pinch right there. Secondly, and what’s a really big issue is

Matt Mulcock: Yeah.

Tom Whalen: In the S corp world, the reason people choose S corp. So I’m going to use a few different terms here. they’re all going to be kind of interwoven, but there’s two ways to pay yourself out of an S corp. One is to pay yourself a wage, which goes, gets reported on a W two. The second way to pay yourself is what’s called like an owner draw or a distribution, or there’s a lot of terms, but distributions or draws or what we call those. but if you have losses. And again, we have no basis now because we have all this debt set up that, you know, we can’t use as basis. We can’t take draw. We can’t take cash out. So the only way to pay yourself is through a W two. And again, we like, why, why is that good or bad or otherwise? Well, at W two, we pay payroll taxes on it draws. don’t. the allure, the reason we want to be an S corp is to have a portion of our profits that are not subject to payroll tax. Well, we can’t access. We can’t access that because we’ve got all this debt. Guess what? can’t deduct losses against our debt. So, it creates this weird cash pinch that the only way to take money out is via a W two wage, which now we’re just creating new, payroll taxes that we maybe wouldn’t have otherwise had to pay. It’s like, that’s a lot there. ⁓ yeah.

Matt Mulcock: I think it’s a great summary though. Let’s break each pieces of pieces of those things down. So starting from the, from the beginning of, think again, that was an amazing summary of why we’re, why we see going one way or the other. And, and, and I think highlighting this timeline that you and I both see, which is early on either, either with an acquisition, but definitely a startup, why you wouldn’t elect escort for probably a couple of years in.

Tom Whalen: Yeah, why not right away then, right? If, if, if I got to pay myself a W-2, whatever. So, in the beginning when we, know, our profit levels are probably pretty low or at least low relative to where they will be a few years down the road. Cause we do have all this upfront depreciation and our interest is as big as it’s ever going to be in our first couple of years. So our taxable profits might not be that high the first couple of years. Well, in the, in the sole proprietor world, there’s another tax topic here, it’s called QBI, qualified business income deductions, QBI, which is a part of the Trump tax cuts his first time in office. what it allows you to do is 20 % of your business income. You get to take a deduction for it. Now there is a phase out range. Once we get to a certain level of income, that 20 % goes away, but we’re assuming at that point, we’re going to be an S corp anyway. But for now, we’re going to assume that we’re underneath that phase out threshold.

So with the escort world, we only get to take that 20 % deduction on our draw portion. So if total profits are 250 and I’m paying myself a W-2, a wage of 150, and then I’ll take a hundred as a draw, my QBI is only calculated on that hundred. But if I’m in the sole proprietor world, all 250 of that would be considered like draws, profits, whatever you want to call it. I get to deduct 20 % of the entire 250, not just the hundred piece. we can have more. fact, all of our income in the schedule C world is subject to this 20 % QBI deduction. So that’s a big, big benefit, huge benefit there. whereas again, in the S corp world, the only piece that’s allowed, you’re allowed to take that 20 % against is the piece that’s not paid out as wages. And we.

No, maybe we don’t know, maybe I’ll just bring it up. We have to pay ourselves a wage in an S-Corp. That’s like a really big hot topic button. Sometimes people would say, Hey, well, why don’t I just select S-Status, not pay myself any wages? All 250 is draws and then none of it’s subject to payroll taxes. That is a, ⁓ yeah, that’s, is, there’s numerous, if you just go Google reasonable comp, the term reasonable comp and then S-Corp, you’re to get a million articles in it’s, it’s a really hot button.

Matt Mulcock: And then not pay myself a wage. Yeah. The IRS knows how that works.

Tom Whalen: Or hot topic button. but yeah. So, and then the, I guess the drawback of being the schedule C situations that you pay payroll tax on every dollar of profit zero to infinite, right. Versus the S corp, you only pay payroll taxes on that wage portion. So my example earlier, I said, Hey, we’ve got two 50 of profits in either scenario. Well, in the schedule C world, we’re payroll taxes on all two 50 versus that S corp world. We’re paying, payroll taxes on the 150 that we paid out as wages. So again, now as the profits increase and increase and increase, and we phase out of that 20 % QBI space, we’re not getting that 20 % benefit. So now all we’re doing is just paying these excess payroll taxes in the sole proprietor world. That’s when we’re like, hey, no, switch to S-Corp because yeah, you’re not gonna get anything for the 20 % QBI either way. Well, at least let’s get some payroll tax deduction here, right?

Matt Mulcock: Got it. Yeah. Yeah. So I love this. So, uh, the way you’re highlighting that is this trade off that you have to determine, around balancing. I mean, there’s a lot of balancing things about there’s a balancing act here a lot, but the one you just highlighted there is the QBI, depending on your income rate versus payroll tax. Um, there’s a couple of things I want to hit on this, but let’s go back to the beginning of this summary of kind of these trade-offs. let me summarize. let me rephrase back to you and tell me if this is right. If this sounds, if a dentist could think of it like this, um, when it comes to the losses piece and the massive depreciation interest in things that on paper show as losses, that’s really the depreciation and amortization are there losses on a balance or on a P and L. so is it safe to say that early on in practice, whether it be acquisition or startup, when you’ve got massive losses that when you’re a sole proprietor, not taxing yourself as an S corp, you’re a silver, so silver Piter, most likely an LLC. the idea is that you can basically pass through, pass through those losses to your personal tax return and show no income, even if you actually have some income that goes away.

Tom Whalen: Yeah. like say you’re an associate, say you’re an associate, um, I start up a practice and I’m working two and a half days a week as an associate somewhere else. And I’m working two, two and a half days a week in my startup. I might have paper losses of, I don’t know, 50 grand on my schedule C on my startup practice, but I might be making 150 to 200 grand over here as my, as my associate gig. Well, I can use that 50 loss to offset my whatever of income over here versus in the escort world, that loss, gets, what’s called suspended, it just gets carried forward and all it can do is offset future income that, you know, that my escort generates. It’s hung up, it gets suspended, yep.

Matt Mulcock: Got it. That’s a great example. Yeah. It’s a great example of, love that you just brought up like an associate, you have associate active income and then you’re doing a strike. That’s really, really common in the startup world. ⁓ and then coming back to the story that I told of this, of my client years ago, who had multiple six figures of depreciation and paper losses that she couldn’t show, like because she basically trapped them.

Tom Whalen: Uber coming up. It’s tough because now if I’ve got associate income from somewhere else, like I have these real losses in my practice, but they’re trapped. And when I am not absolutely killing it, every dollar counts. Right. If I can’t use those tax deductions to offset my other active income, that might create this cash pinch that I wouldn’t have otherwise had. If it’s going to be a difference of 20, 30 grand in taxes. Yeah. Now we, we understand that we’re not losing those deductions forever. They’re just getting pushed out into the future. But as you know, if I can save 20, 30 grand now in taxes, that’s going to matter so much more when my cash is as low as it’s ever going to be than say years down the road when I have tons of excess cash. I’d rather have that 20 grand today.

Matt Mulcock: Yep. Yeah, totally. The, the other piece of this, just thinking of this particular client that again, this was just an all, this is just a huge mess. Elected S corp way too early, took massive depreciation by the way, via 179. so they took 179 deductions on all the equipment and everything. So just to, to, I think piggyback a little bit off episode two that we did the, why that’s such a problem.

Tom Whalen: Yep.

Matt Mulcock: And tell me if this is a mischaracterization, Tom, but the reason why I saw this as such an issue is she was showing no income anyway. She was showing no income anyway. Cause they were, wasn’t making any money, but then the, the CPA decided to elect S corp and then take massive one 79. We’re talking multiple six figures of one 79 deduction, as opposed to putting that on a more elongated schedule to allow her to have future deductions or depreciation to offset the income that was naturally going to be growing in years three, four and five.

Tom Whalen: Yeah. Bingo. And when you do that, like you said, you show zero income. It’s like, we’re not really paying tax anyway. So why do we need to front load these deductions? Cause now we’re just pushing them into a lower tax bracket, which like you said, gets into the prior episode too. Again, pushing deductions into a low tax environment is not great tax planning. It’s just not. So we want to have those deductions go against a high bracket income instead of a low bracket income. So yeah, now we’re crossing over episodes here. It’s pretty nice.

Matt Mulcock: Yeah, yeah, that’s good. Again, that’s what we’re trying to build upon these, but let’s talk about, I do, um, do this with hesitation because it’s a really, really complicated topic that a lot of people, think, misunderstand, but I think it’s important to try to tackle in this episode. You mentioned it earlier, kind of the second piece of this summary of, the trade-offs that you’re making is the topic of basis. And the other piece, again, referring back to this client that, um,

Tom Whalen: Mm-hmm.

Matt Mulcock: This started to really create is still creating issues for her is what it does to your basis. When you elect S corp too early and you take massive depreciation or massive deductions. Can we talk about that for a moment?

Tom Whalen: Yeah. Yeah. So like, what is basis, right? Like maybe back up a touch there. It’s a, it’s a floating target. So I get basis when I put money into the practice. If I, if I put $50,000 of my own cash into the practice, I start with $50,000 of basis. Well, that’s a moving target because I will take money out eventually. So if I put 50 in and I take 30 out, my basis is now 20. We also get basis when we have profits inside the S-Corp.

Matt Mulcock: Yes, yes.

Tom Whalen: That we leave inside the S-Corp. So if there’s $100,000 of profits that I don’t draw out, my basis goes up by 100. Right? So we’ve put 50 in, 100 of profits, now it’s at 150. But then if I pull out 30, now I’m at 120. So that basis is a moving target. Every single year we have profits or losses. But the losses, they’re generated, which are almost always generated from depreciation. Most the vast, vast majority of dental practices are making money, like actually economically making money. But then yeah, you buy a bunch of equipment or you do a startup practice or whatever, and you accelerate a lot of depreciation. You can show a taxable loss, but what that does again, when there’s losses and deductions that reduces my basis dollar for dollar. Okay. So if I take all this 179 and I have zero basis, well, I like, if that happens, I can’t take money out of the practice. It locks up all this cash because if I do, I start to pay tax on it. And that’s not ideal because then eventually I’m going to have to pay the loans back that I funded my practice with. And how do I get money to pay back the loans? Well, I generate profit. Well, I to pay taxes on the profit. So it’s like, you’re taking the, you’re taking it out, paying a dollar, you know, take out a dollar, pay tax on a dollar. And then I pay that dollar back. I pay tax on that dollar as well. So it.

When your basis is zero, that is not a good situation because now we can never touch any cash. And then a lot of times what happens is, again, if we take a bunch of 179, these are, again, are losses funded by loans, right? Well, eventually I’m going to build up a bunch of cash. So you can have a bunch of cash sitting in your practice with hardly any basis. People are like, well, why can’t I take out, you know, I’ve got 300 grand of cash. Can I take a hundred? It’s like, well, no, your basis might be zero.

Matt Mulcock: Yep.

Tom Whalen: It’s because you took all that depreciation. either if you take a dollar out, if I give myself a dollar of cash, that lowers my basis. If I take a dollar of tax deduction via depreciation, that also lowers my basis. So what happens is sometimes people will take a bunch of cash out and then towards the end of the year, the account’s like, oh shoot, there’s all this income. We need to take all this 179. Now our base.

Matt Mulcock: But now your basis is down to zero.

Tom Whalen: out, right? So it creates this pinch where I can’t touch cash for a long time. That’s probably what happened with your situation with your

Matt Mulcock: Exactly what happened and tell me if I’m wrong, Tom, but you said it earlier, electing S-Corp too early is what causes this problem as well. That’s the genesis of the problem, right? Because that’s where it changes the status of how you take depreciation. changes the status of your basis and how that’s factored in because that’s exactly what happened with her. She elected S-Corp far too early, took massive, massive depreciation basis went to, it was zero. And then

Tom Whalen: Zero or negative.

Matt Mulcock: Or negative, but then she’s doing well in years three, four and five has all this money that’s piling up. And it’s like, well, now it’s really complicated to get that money out of the business.

Tom Whalen: Yeah, now how do I take this cash out? Well, what we always tell people, you took it out in the form of deductions, but that, tax deduction doesn’t put food on the table for me, right? Exactly. So what you then have to do at that point eventually is you need to, so you probably have this big pile of cash, but your debt’s here. You need to pay down some debt. Because people will say like, what do I do with all this cash then? Like, I can’t touch it. Like, how do I, what do I do with it?

Matt Mulcock: Yep. Yep. It’s just paper. Yeah.

Tom Whalen: Pay down your debt. That’s the way to even out the basis. So I try to use a simple example. If I buy $200,000 of equipment with $200,000 of debt, if I take 179 on that, now my assets that that equipment is worth zero from a tax perspective, but my debt is 200. So I’m upside down $200,000 in a basis scenario in that situation.

Matt Mulcock: On paper, yeah. Yep.

Tom Whalen: Well, now if I’ve got 200 grand of cash, people would say, why can’t I touch it? Well, because you’re upside down on your basis. So what you need to do is first pay off that 200 of debt, right? Or to balance the scales a little bit. Now debt would be zero, equipment would be zero. Now any excess cash, I can build it up. Otherwise you need to just keep a baseline level of 200 grand of cash to offset that 200 of debt. And you can’t touch anything up until our assets and our debts are balanced out.

Matt Mulcock: Yeah. just balance it out.

Tom Whalen: And that can be really frustrating because again, if I’ve got, you know, on the personal side of things, I’m kind of scraping by, but I’ve got 200 grand sitting in the bank in my business account. Like it just seems like I should be able to touch that. Now it’s not like you’re going to be in trouble if you do, it’s just, you are going to pay extra tax and we are not necessarily in the environment of just manufacturing tax, which I don’t, that’s a good idea.

Matt Mulcock: Yeah. Yeah. Yeah. Or it can, it can make things complicated because tell me if I’m wrong here, Tom, but if you do end up taking that money out, you have to do a loan to shareholder, right? On the balance sheet, you have to actually track it that way.

Tom Whalen: Exactly. So what happens is people say, Hey, I’m to take this money out. And then later on in the year, CPS like, Oh shoot, we need to take all this 179. We already took the money out, right? You already distributed it and you can’t do both. that, know, you take cash out, you say you get a dollar of cash or you get a dollar of deduction. The problem is when you do both, that’s when you create the basis issue. And when that happens, then the accountant will book a huge loan loan to shareholder. This wasn’t a distribution. This was a loan.

Matt Mulcock: Yeah. Yep.

Tom Whalen: Well, the only way to either get rid of that is A, pay it back or B, in future years, we just, we chip away at it. say, Hey, we’re going to write off a chunk of this loan and call it a distribution this year when we do have basis. And just, do that for four or five years or whatever the case may be to get rid of it. But again, it’s, really limiting your ability to take cash. Now, if we were in the sole proprietor world, you can do that because again, you can use debt. For basis, whereas in the escort world, the only thing you can use for basis is your own cash contributed. So, um, now, now with that being said. In the sole proprietor world, let’s say we do that. We take one 79 and we take the cash out. So we, we do have this negative basis, but that’s okay in the LLC, the sole proprietor world. Um, but if we want to make the switch to escort, we have to get back to even. So you can kind of play that, um, I don’t want to say shell game, but you can.

Matt Mulcock: Yeah.

Tom Whalen: you’re deferring your tax consequences. And oftentimes it’s a good idea when the cash matters the most upfront. Not everybody’s situation is different. We get that. We have to take that into consideration. But a lot of times we would rather have the cash today and deal with the taxes down the road. So again, if we’re a negative equity situation, negative basis situation, which is okay in the Schedule C world, the only thing we need to note is that we do not make the switch to S-Corp. Until we’re back at zero. And if you switch too early, it’s called phantom income. So for minus 50, for negative 50 in basis, what that means is just you’re creating 50 grand of income when you make that flip. So then you pay tax on 50 grand of income that you don’t actually have. ⁓ now something like I’ve been in a situation where we’ve done that because the payroll tax savings was so astronomical, they like just absolutely hit their stride and just crushed it. And we’re like,

Matt Mulcock: Yeah. Yeah.

Tom Whalen: This is makes sense. Like we don’t want to wait another year to defer this S-Corp election because you’re absolutely killing it. But we were very, very intentional with our plans there. It’s like we knew exactly what the situation was, we could quantify the dollar amounts. We made the S-Election maybe a year earlier than we thought, but that’s just because they absolutely crushed it.

Matt Mulcock: Yeah. So, so every, I mean, I hope this is helpful. I, I want at least highlighting how important it is to have a plan around this and be intentional about this, but is it safe to say Tom, obviously speaking to a general audience of dentists. So we can’t know every single person’s situation specifically, but I think it’s safe to say that early on in your Life as a practice owner. I’m gonna say most likely in the first somewhere between three and five years Startup and or otherwise It probably generally makes sense to hold off on s-corp election rather than elected too early. Is that Probably generally I’m really hedging my bets there

Tom Whalen: Probably. Yeah. ⁓ Yeah, yeah, exactly. Now, again, we’re still having those conversations though. Like it’s just, it’s not something that we want to just, hey, we’ll shelf this for five years, right? It’s like, let’s look at profits every year. What’s the trajectory look like? And if you bought a practice, let’s just say in January of 25, like maybe you’re not at the level yet, but maybe in Q4, you’re tracking to make a half a million bucks. If we were to annualize Q4. It’s like, we might make that S-election.

Matt Mulcock: Continue to think about it, yeah.

Tom Whalen: Even though this year you might have big losses or very little income or whatever the case may be, but if we’re tracking on an annualized basis Q4, it’s like, well, is this the new reality? Because if so, we’re going to make that S-selection. like you said, I would agree that it’s very common that we’re not making an S-selection for the first few years, just because again, the depreciation and the interest is so heavy in those first couple.

Matt Mulcock: Got it. So if I’m thinking about this the right way, I’m trying to like organize the kind of the way a dentist could think about this and kind of three phases of like early to mid career when it comes to thinking about what level you are on income. So level one would be basically showing zero profit, zero income, because you’ve got such depreciation, such big depreciation, amortization, all that early on that you’re in phase one again, probably generally in most cases in phase one. You would not elect that score, but phase two is a, is a interesting conversation where you brought up earlier in phase two, it’s where you’re starting to get to that level of like playing the QBI trade-off is where are we with that QBA QBI and how does that impact this? And then phase three would be like, I’m killing it. I’m so well beyond. yes. You’re you blown by QBI. So let’s talk a little bit more or just summarize a little bit more. we’ve talked about phase one.

Tom Whalen: Yes. Yeah, I get no food benefit anyway. So let’s get the food tax benefit. Yep.

Matt Mulcock: Again, you’re showing no income first year, three years, probably up to maybe even a year four or five, but for sure the first two or three phase one showing no income, it most likely will not make sense to elect S corp. You’re going to cause a lot of problems in phase two, this QBI. Can we just summarize one more time? We’re just kind of like in this second phase of now you’re in this kind of middle ground of where that, where that trade off they need to be considering.

Tom Whalen: Yeah. So, um, so again, the QBI, it’s just, it’s a 20 % deduction on your profits. Okay. So if I have a hundred thousand dollars of profits, I’m only paying tax on 80 of it. Super powerful. Right. Um, yeah, super. And then in the, again, in the S corp world, profits are defined as everything that’s not wages paid to yourself. So again, if I made $250,000 all in, but 150 of that, I paid myself as a wage.

Matt Mulcock: Yeah, huge.

Tom Whalen: Well, what’s left over is a hundred grand of profit. And therefore I’d take a 20 % deduction on that. pay tax on the 80. In the Schedule C world, my profits are all 250. So I’m taking 20 % of the 250. My deduction is 50 grand instead of 20. Yeah. Yep. Exactly. Now again, in the escort world, I’m paying payroll taxes only on that 150 of wages I paid myself versus in the Schedule C world, I’m paying tax.

Matt Mulcock: $30,000 difference here.

Tom Whalen: apparel tax, should say, self-employment and apparel tax are kind of up to the wage base, up to the 176 or whatever it is, but you do pay Medicare on everything.

Matt Mulcock: Up to the wage base. I was gonna say then the Medicare is unlimited, yep.

Tom Whalen: Social Security is capped every year. It’s changing this for 2025. It’s like $176,100. But then again, Medicare goes on forever. So at the end of the day, ultimately, that’s what we’re saving is Medicare, right? Because that will go away. I’m sorry, the Social Security will go away. But the Medicare, there’s a few pieces of it. There’s employer, employee, and then there’s the extra Medicare surcharge. So when it’s all said and done,

Matt Mulcock: and change, yeah.

Tom Whalen: about 3.8%. So we’re saving about 3.8 % on our profits eventually once we exceed that social security threshold. if there’s nothing else to consider, there’s 3.8 % savings baked in once we’re in S-Corp. Now, once we’re past that QBI phase out, like said, why wouldn’t you take S-Corp? Because we’re saving 3.8 % across the board on our profits. But up until that point, it’s like, does it make sense? Again, we got it, we got to look into that. there are other benefits potentially with state pass-through entity tax taxes where, you know, we can get that to apply in the S-Corp world that wouldn’t apply in the Schedule C world. So there could be more benefit beyond that. But again, generally speaking, that’s kind of like when you’re at the upper income levels anyway. So like you said, there’s this middle, middle ground almost where it’s like.

We’re not there yet. We’re tracking it upward, but we’re in this sweet spot where we’re still getting QBI benefit and it’s going to outweigh the payroll taxes that we’re going to pay on the Schedule C.

Matt Mulcock: Yeah, that middle phase is probably, it’s actually kind of interesting because I was a lot of dentists in that phase, in that middle phase, it’s…

Tom Whalen: And I want to highlight too, a lot of times we think, hey, once we’re hitting around $400,000 of profit, now that’s gonna be married filing joint. It’s really, I you it’s closer to 450 of profits, it keeps ticking up. If we’re married filing joint, 450 grand of profit, and I will back up, that would assume your spouse does not work. So 450 of joint income, let’s just say. So if my spouse makes 100 grand, that my profits in the business, once they’re kind of in that three, 350 range, like we’re having the discussion around S-Corp. But if my spouse doesn’t work, kind of looking at that four, 450 range. But that again is taxable income. So let’s just say I’ve got, I’m maxing out my 401k. My wife is on payroll. She maxed out her 401k. Maybe we have kids on payroll. I might have like a true economic benefit of $500,000.

But my taxable amount, be when I back off 2,401Ks, when I back off some kids on payroll, I back off a standard deduction, now we’re down around 400. You might say, I’m kind of, I’m making, my CPA says I’m making 500, but my tax return shows 400 or 390. Like, what am I missing here? It’s like, well, not everything that you’re making shows up on a tax return. So again, just because your P &L shows like true economic profit of 500, doesn’t mean we’re automatically switching gas corp at that time either.

Matt Mulcock: Yeah, that’s a really good distinction and good point and highlighting the impact and ripple effect of again, proper planning around taxes and the different, when you’re in this middle phase of making between three and 500 or maybe even higher, it could be 550 of gross income of total income, but the ripple effect of doing proper planning and having all these other deductions, you know, all these other tools in the tool chest of again, like you said, retirement plans, kids on payroll, Augusta rule, shared up strategically giving to charity the right way. from a tax perspective, all the like those things can have a multiplier effect if it gets you into the QBI range as well.

Tom Whalen: Sure. Yeah, exactly. Because again, like if we’re just above the phase out range, well, let’s say now we’re down into the phase out range and I put an extra, I don’t know, I have a $20,000 deduction. Well, that’s actually going to save me like you might think, well, it’s, uh, yeah, 20,000 bucks, but it’s actually going to be like a $25,000 income reduction because if I’m now going back into the phase out range where I was out of the phase out range before, and I didn’t get the 20 % savings, now I am getting the 20 % savings, I’m gonna tack that on there as well. So it’s, when we’re in that phase out range or just out of it coming back into it, not all dollars are created equally.

Matt Mulcock: Yeah, big. Yeah, that’s a really good point. And when you can use things like a retirement account, 401k HSA, things like that, where you, where you actually can keep the money, but it can, it can be removed from your tax return. Like that’s, or from your taxable income. That’s a huge, huge benefit.

Tom Whalen: On it. Huge, huge benefit. And I think just to kind of put a button on that is like that middle section is we’re making money, but we’re still kind of playing with the benefit of QBI versus the costs of the payroll tax. Cause that’s really what it comes down to in that middle, in that second tier, second phase. Yep.

Matt Mulcock: Yeah. Yeah. In that second tier. Yeah. That’s really, really important. If you’re out there thinking I’m somewhere in this range, which a lot of dentists are, this would be something you definitely want to be thinking about talking to your CPA or accounting team, tax team about where, you know, what these trade-offs are. Cause that’s all this is, is making trade-offs. You’re going to probably, depending on what you do, you’re going to be paying more in payroll tax to your point, Tom, but it might be well worth it because you’re going to be saving that much more on the QBI side, but you’ve got to be able to have someone on your side that’s actually looking at that and being able to plan that out for you. Um, phase three, I think pretty straightforward. Once you blow past that and you’re kind of like, you’re at the level of you’re making five, 600, 700,000 beyond in profits. It’s like S corp elections. It’s going to make sense.

Tom Whalen: For sure. Yeah, like you’re not getting any benefit anyway. There’s really no reason not. And now I should never say never, but there’s not a ton of benefit to not being an S-Corp. Now, if we’re in a multi-owner situation, we might have a partnership for that. Let’s say you and I own a practice together 50-50. The practice we own. ⁓ yeah, exactly. I do faint when I see blood, so I’m not sure that’d be good.

Matt Mulcock: We would dominate by the way. We’d kill it. We’d kill it. Yeah. So we wouldn’t do it. Yeah, me too. Get a little queasy.

Tom Whalen: Right, but if we own this practice 50-50, this practice might be set up as a LLC tax as a partnership, but then we might have our own little satellite S-Corp entities underneath that. ⁓ You have super common, now maybe I just bought in, right? Well, so mine would be potentially an LLC, now a sole proprietor. Yours might, maybe you’re more established. You’ve been in it 10 years now. Now your profits are high enough that warrant switching to S-Corp. Mine might not be there yet, but.

Matt Mulcock: Really common.

Tom Whalen: So we might have three different structures that the overall practice might be a partnership for tax purposes. Yours might be an escort, but mine might be a schedule C. So there’s a lot going on there. But yeah, once we get to that point, we’re above that QBI threshold, it’s kind of, you know, there’s not a ton of reason to not be an escort.

Matt Mulcock: Yeah. All right. Yeah. That’s what we are. That totally makes sense. let’s talk really quickly about another trade off here that I think needs to be considered when you’re out there considering S-Corp election versus not would be the actual cost of tax filing. I think that’s something that doesn’t always get talked about. ⁓

Tom Whalen: Yeah. Yeah. Cause I mean, when you, when you’re a schedule C that’s just a schedule within your personal tax return. Right. And you don’t pay yourself wages. So like, let’s maybe I’m a, um, like a 10 99 contractor as an associate. don’t have any employees and I just get a, I get a 10 99. There’s not going to be a ton of costs of compliance tax compliance that is, because again, there’s not a separate S corp return. Don’t have to do payroll filings, W2s, all that stuff. So. There are, there is an added layer of complexity to the escort world. So that’s a very, very good point. Now it’s not like generally speaking. I would think it’s not going to be a huge, huge dollar amount, but you know, might be a few grand over the course of a year difference. If you’ve got to run the payroll now and do the escort filings and whatnot, um, that wouldn’t otherwise be there. So that’s for sure part of it.

Matt Mulcock: Got it. So something to consider probably not if you’re at this level of considering it and oftentimes it’s not going to be like, don’t do it. Cause it’s going to add a few thousand dollars to your.

Tom Whalen: Yeah. Yeah. And a lot of times, I mean, I would say more often than not, it’s like, if I own a practice and I have employees, I’m doing payroll anyway. Right. So now if I flipped to Escort and I add myself to payroll, there’s really no added costs there because we were already paying for it. the added costs in that world would be like just the Escort filing. But again, if we are a 1099 contractor, now I have to have a P &L on a balance sheet. Like, you know what I mean? I don’t just take my 1099.

Matt Mulcock: Yep. Yep.

Tom Whalen: there’s more to it. yeah, there’s, there’s for sure going to be some added costs there.

Matt Mulcock: Got it. Tom, any, this is maybe a whole other podcast, but I do, still need to bring it up. Hope we’re talking entities and tax allocation. Occasionally we hear very rarely, but occasionally we hear, a dentist who says, we’re elect. going to create a C corp. We’re going to go C corp. This used to be more common back in the day, but now we rarely see it, but I guess I’ll just ask it this way. Is there a situation? that a C-corp would even make sense for a dentist.

Tom Whalen: So again, never say never, but usually they are older and it would be, I don’t want to say cost prohibitive, but it would be, I have a C Corp client of mine and they fit the absolute mold of why would somebody stay at C Corp, right? They’ve got five owners and in the S Corp world, we haven’t talked about this, so I’m glad you brought it up. We have to pay out, these distributions or these draws, they have to be paid out in the same proportion as our ownership percentages. So again, if you and I own this 50-50 practice, that’s an S-Corp. Distributions have to be paid out 50-50, right? Well, what if based on our comp formula, I’m only supposed to make 200 grand this year and you’re supposed to make 700 grand? Well, my maximum distribution I could take would only be 200, but we know that I have to pay myself a W-2, a reasonable W-2.

And maybe a reasonable W two might be $200,000 and therefore I would have no room for distributions and therefore you would have no room for distributions because they have to be paid the same amount, right? It’s 50 50 in this case. But so I have a practice that’s five owners. and the way their comp formula works, one of their owners who, and they’re all 20 % owners. one of the 20 % owners just doesn’t make a ton, relative to these other four owners.

And therefore there’s just really no room for distributions. And they’ve always been a C Corp from way back in the day. We haven’t made the switch to S Corp because I’m like, I can’t pay distributions to you guys because again, the lower tier earner isn’t making enough that would justify us paying any out. Now, and again, I wouldn’t set them up day one as an S Corp. I’m sorry. I wouldn’t set them up day one as a C Corp.

Matt Mulcock: Got it. the C-Corp.

Tom Whalen: As they’ve been in S-Corp, like, well, you know, we, there’s no reason to switch at this point because we’re not going to get any benefit anyway. And then we don’t have to go through the exercise of actually doing it. if and when, now I think it’ll be a few years, but when this lowest earning provider is out, we’ll probably flip to S-Corp at that time, because I mean, she’s getting older and that’s the reason why she’s not making as much because she’s just not working as much. So when the rest of them are making some and they have enough room in their comp formulas to justify paying out distributions, then we’re going to make that switch. But again, like I wouldn’t start them up from day one. There are some, there are some like health insurance benefit plan type things that are, you know, beneficial potentially in a C-Corp versus an S-Corp world, but usually it doesn’t outweigh the added or the benefit of the payroll tax savings. Cause that’s kind of the same thing is you got to pay everything out as a wage because in the C-Corp world, whatever you leave in there as profits and don’t pay out as wages.

Matt Mulcock: Yeah. and it might get

Tom Whalen: Then you got to pay C-Corp tax and then you pay it out to yourself and then you got to pay dividend tax. So it’s two layers of taxation. I mean, I don’t have any particular clients. And in fact, I don’t know that we in our current client base across the company have people who we’ve opted to make the C-Corp. Yeah.

Matt Mulcock: Yeah. C-corp. Yeah. That’s what we’ve seen over the years too. It’s really, really rare. And what you said is where we do see it is old school, like a dentist who did it from years and years and years before that just still has it.

Tom Whalen: Yeah. And F-corps are not super old. Like they weren’t, they haven’t been around since the dawn of time. C-corps were. like every, old school, like you said, um, they all started out as C-corps cause they all needed to be, you know, professional corps or service corps. Well, C-corp was the only potential option. And then LLCs came about, I don’t know, 30 years ago, maybe. And S-corp’s right around similar time. So like this S-corp thing is, it’s still.

Matt Mulcock: Yep.

Tom Whalen: Kind of old, I guess, but not like in the whole tax code, S-courts are not old. Um, so making that election, you know, you get a lot of these docs that are in their sixties and they just haven’t switched over yet. And then there’s maybe it’s a different discussion for a different day, but the whole built in gains from switching from C to S. You gotta have like a five year cool down period. And if I’ve got less than five years to practice anyway, well, then why would I switch? Cause I’ve still got this built in gains issue that’ll be with me until I sell.

Matt Mulcock: Yeah.

Tom Whalen: so that’s, that’s something that we always deal with too is if, Hey, Hey, when are going to retire doc? I don’t know in two years. right. Well, you’re still within that five year window. We’re not going to make that switch.

Matt Mulcock: Yeah, I’m glad you brought that up too. And this story you told even as there’s a big difference in saying we would have elected this before. Like if you were starting today, we’d elect this for you versus we’re going to keep you in it. Those are two different things. There’s a lot of reasons to say, we’re just going to keep this where it is. Same thing with the client. I mentioned to start this whole thing is there might be reasons like it might’ve been a massive mistake to do that, but it doesn’t mean we’re going to reverse course now and like completely deconstruct it and change it.

Tom Whalen: Yeah. you can, if you, there’s kind of a finite situation or fact pattern where it would make sense. But if you elect S status, you can revoke that election, but then you can’t reelect S status for another five years. So it’s like, if we’re again, we figured this out, we’re in year two and we figured by year five, we’re kind of make that switch anyway. Or we’re not going to elect that in say year three, because we’re so close enough to year five.

Matt Mulcock: trying to find that balance.

Tom Whalen: So it just, it has to be pretty narrow fact pattern for that to make sense. ⁓ But it can technically be done. So.

Matt Mulcock: Yeah. But again, considering the difference in saying, I wouldn’t have done this the first time to start, but here we are. Now let’s think about what to do from here. It’s not helpful to be like, I wouldn’t have ever done that. It’s saying, okay, here’s where we’re at. Here are the trade-offs we’re going to make now, or the things to consider if we’re going to revoke that election. Here’s what that means. It’s whole other discussion versus people that are listening to this. Hopefully you’re in a situation where you have the choice or you’re, you’re considering the choice beforehand versus like, I’m in this mess. Now what do I do?

Tom Whalen: Yeah, like life changes too, right? mean, you might buy a practice and you’re like, I’m going to light the world on fire and I’m going to go take it from 800 grand of collections to 2 million. And I’m just going to blow the roof off all this, all those superlatives. And I don’t know, maybe you have, instead of having one or two kids, you end up having five and you’re like, boy, like, I just want to be at home more. I’ve got so much going on in the home life. Like I can just, I can make 300 grand comfortably and I like that supports us and I don’t really need to go crazy with it. And maybe we were waiting to elect S status or we did elect S status cause you were on that track, but now you’re like, I want to reverse course because life has changed so much. can do that. now again, you just, can’t re-elect S for a while, but like life changes. So again, it’s one of those, we talked about it earlier. It’s not one of those things that you just set it and forget it. It is something to just.

Matt Mulcock: Now you’re backing off.

Tom Whalen: Continually monitor what’s your life situation looking like, what’s the practice situation looking like, does this still make sense for today and for the next however many years?

Matt Mulcock: Yeah. So good. Tom, to, wrap this up, want to, probably let’s, let’s summarize the common mistakes that we’ve kind of like been alluding to throughout this entire discussion. And then we can summarize the solutions with things to be thinking about from here. So the common mistakes that I’m hearing as we go through this is number one, no particular order, but, so, staying a sole proprietor too long, there’s, there’s some mistakes there that could be created. If you stay sole proprietor LLC and not elect S corp. if you wait too long to do that, I think what I’m hearing is that what we see is paying too much in payroll tax. Okay. Number two would be electing S corp too early. And we highlighted that being basis issues, locking up losses within the practice. can’t fully utilize, creating some issues with like paying yourself a wage. How do you do that?

Tom Whalen: Bingo. Yep.

Matt Mulcock: I think the other thing we didn’t highlight, even though it’s still low, the S-Corp election can increase your chances of scrutiny from the IRS.

Tom Whalen: Yeah, I would say I would agree with that if you’re not paying yourself a reasonable wage. But that simply doesn’t exist if you’re a Schedule C, right? So if you’re like, hey, I’m going to elect S and I’m going to pay myself a reasonable wage, no added scrutiny. But if you’re not paying yourself a reasonable wage, absolutely there’s added scrutiny.

Matt Mulcock: Got it. That was the next thing on my list was electing S-corp, but not paying yourself enough. So paying yourself artificially too low of a wage or not a wage at all, that’s going to be a problem. Got it.

Tom Whalen: Yep. Bingo. Yep. And there are people that do that. And it’s, I just think you’re really sticking your neck out there. Um, cause a lot of times people like, Hey, maybe I was an associate at this practice and I was making two 50 as an associate, but now that I bought the place, I’m going to pay myself one 50 or one 20. And it’s like, well, I would argue you should pay yourself more because you’re doing more. You’re putting more out there, putting your neck on the line to be an owner. The IRS would argue that. Um, obviously we, we play the

Matt Mulcock: Yep.

Tom Whalen: You play the game a little bit and try to understand where a sweet spot is. But I just think a lot of people have flawed logic. And if I was making more as an associate, now I’m making less as an owner. It’s kind of like that maybe a little bit of a red flag. Yeah. Yep.

Matt Mulcock: Yeah. Tough, tough to justify that for sure. okay. And then, paying yourself. So electing escort, but paying yourself too much in W two wages, possibly overpaying in payroll tax. There’s a balancing act here as well that we didn’t even get into around, you know, making things more simple with quarterly taxes versus just paying everything through W two. But I think this is something to be considering of paying yourself too much can sometimes get you, paying unnecessary payroll taxes. You don’t need to. Yep.

Tom Whalen: Yeah. mean, like that’s why we switch, right? Like that’s why we switched to be an S corp is to save on payroll taxes. So again, if you were making 300 as the associate, I know just said a minute ago, maybe we don’t want to just cut it down to nothing. but we do want to take an appropriate measured response and kind of get our way to where we want to be. what’s reasonable. Everybody’s different. Obviously every practice is different, but

Yeah, like that’s why we switched to S corpus to save the payroll taxes on the wages. So yeah, we see it a lot of times where it’s just overpaying and it’s like, well, we don’t want to cut it down in half overnight. Maybe it might be a multi-year approach to not really like, you want to pay yourself 400 and then 150, but might be 400 and then 380 and then 330 and get our, get our way down there eventually.

Matt Mulcock: Yep. Yeah. Yeah. Great point. And then the last one, uh, kind of been a theme through this whole discussion of treating this as a one time decision and a one time act where it’s not something you’re reviewing on a regular basis. I think that’s a really common mistake that we see.

Tom Whalen: And again, you might get to a point where you are done with it, right? Again, if we’re 10 years in and I’m making $800,000 a year, and you’re good forever, you’re gonna keep doing that forever, honestly, you’re probably done with that piece of it. But if our income’s like this, or we’re just tracking upward, or tracking downward, I mean, there’s a lot of times, a lot of situations where you just need to have the discussion. might be a 15 minute discussion every year, but at least have the discussion.

Matt Mulcock: At least be considering it. Yeah. okay. So kind of the flip side of that, I think there’s just, we’ve, we’ve alluded to this, but I think choosing the right entity and tax election for your stage of your practice, depending on where you are. generally speaking, if you’re early, early on, it’s probably not going to make sense to, to do an S corp too soon, but be, again, be thinking about that and be talking to the right team and having the experts in your corner, setting your W two. income, you do elect or when you do elect S corp intentionally. And then like you said, finding that balance, reviewing this on a regular basis. And then the last, I think most important one is have a team coordinate with advisors and a team.

Tom Whalen: Yep. I was going to say that to you, like, attorney should be involved in this discussion as well, because again, I said it earlier, but there are some states that do not allow for LLCs. Now, some of them allow for PLLCs, which is a professional LLC, but some states don’t even allow those. So we might not even have this option. So if you’re going into, you know, buying a practice and we’re doing our due diligence and we’re just assuming that we’re going to be a sole proprietor and we’re kind of basing our cashflow off that. And you’re in a state that doesn’t allow for LLCs, like that’s good to know on the front end. So again. Not just your CPA, but get your attorney or advisor, get everybody.

Matt Mulcock: Yeah, so great. Well, Tom, we did it. We did it. We were able to officially do a podcast on entity structure and tax allocation. Hopefully it’s helpful for everyone. Any final words of wisdom on any of this?

Tom Whalen: I don’t think so. just, just, just get everybody involved, get your team involved. You have a team use them. I couldn’t stress that enough.

Matt Mulcock: Yeah. And don’t assume, I think that’s a key theme here too is don’t assume the whole classic because everyone’s doing it. I should do it. Yeah. Eventually you’ll be an S corp most likely, you will elect S corp as an LLC. but it doesn’t mean you should be like timing does matter here. Big, big time. This is awesome. If everyone, if you’re still listening, you’re one of the cool ones. We really appreciate it, especially on a tax, tax episode.

Tom Whalen: Timing absolutely matters, yep, for sure.

Matt Mulcock: If you want more Tom and his team and, and, and us, have teamed up and I’m going to really give Tom all the credit here for, I believe our second or third annual year end tax checklist. so, really, really helpful. You what it’s va it’s available. It’s ready to go. So you can actually check it out. Dennisadvisors.com slash 20, 25.

Tom Whalen: I it’s coming out soon. just finished that up.

Matt Mulcock: You can get the updated version that we had last year of 2024. can get the updated version now on the website. That’s denisadvisors.com slash 20, 25. It’s our year end tax planning checklist. Highly recommend checking that out. Take it to your CPA. if you need a CPA or tax team, guess what? Give us a call. We actually do that. So, um, check out denisadvisors.com. You can book a free consultation there by clicking the button. We’d love to talk to you.

Tom Whalen: It was quiet.

Matt Mulcock: If this was helpful, if this episode was helpful to you and you think there’s Dentist out there that need to hear it, we’d love for you to share the episode. we, want to be able to share the good word and hopefully add value to the dental community. We’d love for you to share the episode, but for now, Tom, thanks for so much for being here and sharing your wisdom. Everyone. Thank you so much for listening until next time. Take care. Bye bye.

Keywords:t ax planning, entity structure, S-Corp, tax allocation, dental practice, CPA, financial advice, tax mistakes, basis, C-Corp.

Taxes