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As high earners, every dentist should have a tax reduction game plan. What’s yours?
Reese’s guest on this Dentist Money™ Show is Jonathan VanHorn, owner of DentistMetrics, a national CPA and accounting firm that helps dentists reduce their tax burden. With 2018 almost in the books, taxes may be on your mind.
On this episode, Reese and Jonathan talk about the best money-saving uses of the Section 179 tax code when it comes to equipment depreciation. It’s a timely discussion that includes why trying to move into a lower tax bracket can be significant. Get ready for some year-end planning ideas, and a conversation that should interest every dentist.
Find out how to keep more of your money with the right tax-saving strategy
To learn more about Section 179 and capitalizing on recent dental equipment purchases visit Patterson Dental’s Section 179 Tax Deduction page.
Ryan Isaac: Hey Dentist Money Show listeners, it’s Ryan Isaac. Thanks as always for tuning in. On today’s show, Reese interviews Jonathan Vanhorn, founder of Dentist Metrics, and host of the start your dental practice podcast. Jonathan is a dental specific CPA, and with the end of the year coming up, we wanted to have him come on the show and talk a little bit about tax reduction opportunities with a specific emphasis on section 179 of the tax code, which relates to deductions for equipment financing. Now I’m just going to give you a heads up and let you know that this interview gets pretty technical, but I promise it’s worth hearing what Reese and Jonathan have to say. For a lot of you, it could mean thousands of dollars in tax savings this year. And even if you don’t quite follow every detail of the conversation, you’ll definitely come away with questions you can run by your CPA. So take this one seriously.
All right. Before we get started, I want to remind you of a couple things. First, go join the Dentist Advisers discussion group on Facebook. To sign up for free, go to dentistadvisors.com/group. It’s a great place to see the financial questions other dentists are asking and to discuss things with people who can relate to your situation. Reese and I really enjoy sharing our perspectives with the group, and we hope you’ll join the conversation. Again, you can sign up for free at dentistadvisors.com/group. Also, be sure to book your free consultation with one of our dental specific advisors. Just go to dentistadvisors.com and click the button that says, book free consultation. You’ll find a time on your calendar that’s convenient for you and then we’ll have a low pressure call to talk about your specific situation and show you how our elements planning process can help you take control of your finances. Thanks again for listening. Enjoy the show.
Speaker: All financial decisions should be based on your own specific situation. Please consult a financial advisor or conduct your own due diligence. This show is furnished by Dentist Advisors, a DBA of acquire wealth, a registered investment advisor. This is the Dentist Money podcast. Now here’s your host, Reese Harper.
Reese Harper: Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with Jonathan Vanhorn. Jonathan, it’s great to have you on the show.
Jonathan VanHorn: Thanks buddy. It’s great to be here.
Reese Harper: I’m glad that we got you here because you’re a wealth of knowledge, and as the owner of Dentist Metrics, which is a full service CPA and accounting firm, and you’re the host of start your dental practice, which is a podcast that I’ve been on and really enjoy that show. I guess I’m just excited to dive into some year end tax planning issues as well as 179 depreciation questions that a lot of listeners have. We’re going to talk about some profitability questions, a lot of things that are in your wheelhouse as a financial expert for dentists. Let’s start by having you just tell us a little bit about your firm and how you feel you guys stand out helping dentists.
Jonathan VanHorn: Sure. We are located in Little Rock, Arkansas. We service clients all over the country. We’ve got clients in somewhere around 35 states, somewhere in that range, maybe a few above or below. We’re up at about 150 dental practices. We focus on new practice owners. We focus on the people that are about to acquire practice or they’ve recently acquired a practice or they’re in their process of doing a startup or they just had a startup that opened. One of the things that we’re really passionate about is that we believe that in order for people to fully utilize tax savings plans, and to be able to actually pay the least amount in taxes, they have to be educated. And that is a part of how you start your dental practice. The podcast came about as that I wanted just to get out there and give more information to people about entrepreneurship, and starting a business, and being able to succeed in today’s competitive dental landscape.
Reese Harper: Totally. We always joke that in the first few years for especially when you acquire a practice scratch start … Sometimes you’re building up your income, but if you acquire a practice, it’s the best cash flow situation you’ll be in for quite a while. You get the most tax benefits early on. Your lifestyle is also not really inflated very much yet. And you’re-
Jonathan VanHorn: Hopeful.
Reese Harper: Yeah. Hopefully right? You just got out of school, hopefully you haven’t ramped it up too much, but you usually are in a pretty good cash flow situation those first few years. And it’s that third, fourth, fifth, sixth, seventh year it seems like people get some surprises. They get a little bit angry. And that’s where I think your education, it can be so valuable because a lot of tax planning really has to do with making sure that your expectations are in line with reality and not vice versa.
And I feel like most dentists typically have the really high expectations for paying the least amount possible. And sometimes, I don’t know if in at least early on in their careers, they really understand how reasonable roll tax planning can play and how much it can really move the needle. There’s a lot of things that can change I guess your overall cash flow quite a bit. And I want to hit on some of those today. One of them being this idea of 179 depreciation. For people who aren’t familiar with it at all, can you just talk about it at a high level, how that works, and why people need to know about it?
Jonathan VanHorn: Yeah. Section 179 is a category of expenses that a lot of people are somewhat familiar with. I’m always surprised how I’ll occasionally get a question from someone like on Facebook groups, somebody will tag me or something like that, and they’ll be like, what do you think about section 179? And I’m like, well, it’s something that’s been around for at least the last 10 years. It’s something that’s not a big mystery at this point. It used to be but now it’s a fairly simple concept. That concept is that if you buy a piece of equipment or what’s called a capitalized assets or something that the government has said, hey, you’re going to get a useful life out of this asset, so you have to depreciate it, and depreciation is simply the recognition of an expense over time.
For example, if you buy a piece of dental equipment that is classified as a medical equipment, so it’s a five year depreciable asset. And if it’s a five year depreciable asset, the reason that they call it that just for concept purposes, is that the government in their infinite wisdom has said, you’re going to get about five years of use out of that. That chair could last you about 20 years, but they’re going to make you write it off over five. And so what you would traditionally do is say, okay, well, I’m going to … if I have to write it off over five years, how is that done? When you take maybe you take 20% each year, that would be the standard way of doing it. But most people go with MACRS, which is an accelerated form of depreciation. And which basically says you can reshape more of it in the first year, and then more on the second, third, fourth, fifth.
And then finally, the last one is section 179, which is something that the government allows for small businesses and medium sized businesses as well to take as a way for them to be able to say, hey, I understand that the government allows me to write this off over five years, but instead I’m going to make the selection to use section 179, and just depreciate it all in the year that I purchase it.
Reese Harper: Okay. Back it up, just to catch people on up on this a little bit. Let’s say I have $100,000 expense, and it happens to fall into the classification of medical equipment. That means it gets assigned a five year … The type of schedule that you can depreciate that over his five years.
Jonathan VanHorn: Right.
Reese Harper: Is that’s correct?
Jonathan VanHorn: Mm-hmm (affirmative).
Reese Harper: Now I have three ways I can, what we call write that off. A lot of people don’t understand what a write off really is, but hold that just one second. We have three things. We have, I can do 20% for five years, so if it’s $100,000 piece of equipment I can do 20 grand per year. Or I could do MACRS, which you said is more in the first year and declining over time. Do you know the rough percentages of how that works?
Jonathan VanHorn: It will be 40, 20, 10, five, or something like that.
Reese Harper: Okay. It depends on … It gets even more complex because there’s things called mid quarter convention and mid-year year. There’s a lot of different pieces that get that math of it. The third option is 179, which I can take it all in one year. How this affects me, let’s say I’m a dentist that makes, let’s go with an average maybe say a national average from the ADA. Let’s round it down so the math is easy. I make $200,000 of annual income. All right? If I take the first option, then the benefit of the first option is over the next five years, I get to have my income show up as if it were 180,000 basically. Instead of 200 I get to take 20,000 a year on that $100,000 piece of equipment. My income looks like it’s 180. That’s not exactly how you would describe it probably in tax language, but it makes my income lower. Right? Is that how it works?
Jonathan VanHorn: And then the way you can just figure out the benefit of that is you look at what your marginal tax bracket is, which I don’t know if we want to go into what a marginal tax bracket is, but actually the marginal tax bracket is what you’re going to be taxed on, on the next dollar that you earn. If you’re at 200,000, let’s say you’re married, you’d be in 2018, assuming that was your taxable income, not your adjusted gross income minus your itemized deductions and things like that, you’d be at 24% tax bracket. So your benefit would be the 24% times the $20,000 savings, which is just I think $4,800 or something like that.
Reese Harper: When would I want to take a MACRS deduction and not do 179?
Jonathan VanHorn: It’s pretty much in the same ballpark of the scenario you just shared that you are pretty sure your income’s going to go … You’re going to be in higher tax brackets in the future years or you’re not currently in the highest tax bracket, and you anticipate being in the highest tax bracket in the next short future.
Reese Harper: If we are looking at how our tax rate is calculated, it’s not calculated based on how much money we make. It’s calculated based on the difference between what we make and what we are taxed on, which is the difference between, we’ll call it gross income and taxable income. There’s a big number and a small number, and the smaller number is after all of your write offs are taken into account. After all your deductions are taken into account. There’s a number you throw in there in the middle, which is adjusted gross income. But just for today’s purposes, let’s just say we have two big numbers. We’ve got one before all the deductions, and one after the deductions. Our tax bracket is calculated on the one that’s after we get all our deductions, right?
Jonathan VanHorn: Correct.
Reese Harper: What are those rates? You said we have a 24, we have a 28, give us the numbers you said. The federal rates from 19, or 18 I guess.
Jonathan VanHorn: Yeah. For 2018 … Hold on. I think I actually had them pulled up recently. The number that is the most common is the 32% number, which is the $315,000 one.
Reese Harper: Yeah.
Jonathan VanHorn: Which that’s the one that we think a lot of our clients we’ll be hitting.
Reese Harper: And what range does that live in? From 300 and what to, to what?
Jonathan VanHorn: It’s 315,000 to 400,000 is the 32% marginal bracket.
Reese Harper: And then it goes to 30 …
Jonathan VanHorn: Five. From 400 to 600 it’s 35, and then above 600 it’s 37. Okay.
Reese Harper: How big is the range from below the 32?
Jonathan VanHorn: Yeah. So the next one is 165 to 315, and that’s 24%. If you think about that, from 315 to 600, there’s only a 5% change, or from the one which is a $265,000 range. But $150,000 range roughly is just one tax bracket, which is the 24% range. If you’re deeply inside of the 32% tax bracket, it’s pretty beneficial to be able to get back down to the 24% bracket because you’re going to be having an 8% drop in every dollar comparatively.
Reese Harper: Exactly. If you’re in the 24 or under 300,000, say you’re in your first few years of a startup, and you could take that big deduction, right? The one of the equipment to get your 179, you knew that in the next two years your income might be significantly higher deep into the 32% bracket. I guess there potentially could be an argument to hold off to try to push most of your income or most of your deductions into that 32% and above years. The more you can let … I mean, if you can allow yourself, I guess to use your deductions in the years where your tax is as high as it could possibly be, but that’s a pretty sophisticated analysis to do.
So you need to make sure you at least have a conversation with your CPA, and do some tax planning before the year end because you don’t want to just assume that it always makes sense to take 179. But I mean, in most cases it will but at least the MACRS depreciation like you mentioned.
Jonathan VanHorn: Right.
Reese Harper: But it seems like the key here is a conversation, and it’s not just black and white.
Jonathan VanHorn: Yeah. It’s not. It’s actually quite complex. It’s an art almost more than a science. And that, in startups especially, it’s even more difficult for acquisitions. Usually with acquisitions, the questions more of when did we take ownership of this practice because if we’ve only … if we have an associate that’s been making $150,000 a year as an associate somewhere and they buy a practice that while it may cash slow, $400,000 in the 12 month period, they may own it for two months. At the end of the year, they’ve purchased that practice in that year, and they’ve got all these equipments they’ve purchased along with that practice purchase.
The question is how much do we take as 179, and one of the good things is that with section 179, you don’t have to take the whole thing. You can actually say, I only want to take 30,000 of section 179 for this big asset purchase. That’s it. You have a little bit of wiggle room with that. Our goal typically is to make sure that we don’t get someone in the really low tax brackets, which is basically below $165,000. Your tax bracket is just 22%. Yeah. If you’re below 77,500 ish, it’s 12%.
Reese Harper: Yeah. And there are scenarios where you can wipe out someone’s income completely and they would probably be like … I’ve seen cases where clients have requested that, right? I just want to pay no taxes. And when you do that, you’re just wasting some of the opportunity that you could have in future years to get even more tax savings.
Jonathan VanHorn: That’s absolutely true. We have some clients that they’ll do a startup in say, December and they’ve maybe had been an associate somewhere else. Well, say they’ve done really well with that, and say they did a quarter million dollars as what they earned an associate from someplace. And they’ve been paying in throughout the year, even though they’ve anticipated the startup occurring, and they get it started and just decided December. And they ask if they can get all their taxes back. Our answer is, we can get you a lot of these taxes back, but we don’t want to get you all of them. And the reason is, because if the tax rate is 12% and all you’d have … you can get back a lot of it. That’s great. When you get you back some of it, that’s great. But would you rather save $1,200 today or would you rather save $3,600 in a year?
Reese Harper: And you can only have the one of the two.
Jonathan VanHorn: Yeah.
Reese Harper: Let’s take the flip side of the client who is well into their practice. It’s a developed practice. They’ve already done the acquisition. They’ve done the startup. They’re buying a new cone beam. They’re replacing a couple of eight x there trying to put a Serac in their office. As long as their income is above maybe even above the $162,000 mark, I would say for sure if it’s above that 300 and change mark … I mean, if you have income in the 32% or above … I mean, keep in mind these are only federal rates. Listeners, we’re not talking about your state rate. I mean, in many of your states … I mean, I’ve got clients in California that it could be north of a 50% or add a close to a 50% tax savings, not just 32% because of their state rate and their federal rate. And because they’re not in the 32 they’re in that 37.
The higher your rate is … I mean, the higher your income is, and the further along you are in your career, the more of a no brainer it is to just take that deduction in one year. Because essentially all you’re doing in that scenario is you’re just leaving money on the table that you don’t need to leave on the table.
Jonathan VanHorn: Right. The question doesn’t become, should we take 179? The question becomes how much in 179 should we take?
Reese Harper: Yeah. And talk to me about that.
Jonathan VanHorn: It comes down to the same as what we talked about before. There are times where we have taken the stance of let’s just go ahead and get the cash back now. It’s maybe a bit of a comparatively way to waiting a year, it may not be as beneficial. And the reason usually is that because say the client is wanting to do a lot of capital improvements, or they’re wanting to make more investments in the practice where they need the cash. For some other reason they have a cash need. They’ve already paid the taxes in, and so they’re trying to get money back out. If that occurs, you can get a refund on your money. But that is really the only circumstance where we try and get down into those lower tax brackets. We usually want to keep that 179 number to where we’re staying in around that brim of 315.
And there’s another reason to stay in the 315 range, which is a bit complex to … It may be our another conversation, but the reason you want to stay below 315 secondary to the tax rate percentages is this thing called section 199A, just to add another section. Everyone knows section basically just refers to where in the tax code this deduction is found. But there’s another deduction called section 199A, which is the big thing that came out of the tax cuts and jobs act of 2017 or 2018. It is a 20% reduction in your income as long as you make less than $315,000. Then as dentist, as well as financial planners, as well as CPAS, then if you make more than that, then you actually don’t get section 199A. It phases out from 315,000 in income to 415,000. For every thousand dollars more you make over 315, it phases out by 1%. At $415,000, that’s completely gone.
Let’s say that your practice made $240,000 or $250,000, you pay rolled yourself 100,000. You had itemized deductions that brought you down to 315, your $250,000 in income, you get a free $50,000 deduction on that business. That is just section 199A. That’s all it is. And then you pay less in taxes because of that. There’s an additional benefit of going below 315 if you can. And that is where our … If we had a map on a wall, that’s where all of our little … that’s where all of our darts would be throwing at is trying to get below that threshold.
Reese Harper: Let’s talk about that a little bit because I think that’s our next topic for today. In my mind, this 199 issue is probably the most confusing thing that people have had to process. You went through it over a high level, but let’s break it down a little bit clearer for people. Basically, [crosstalk] there’s the new magic number that allows people to get a 20% deduction on their income. And that new magic number is 315,000, right?
Jonathan VanHorn: Correct. The question is, okay, if we’re at $415,000 as what you made versus $315,000, and so the tax bracket on income below 315 is 24%. On $50,000, you get … What’s 24% of 50,000? I guess it’s $12,000. Would you rather have … Reese, would you rather have me give you $100,000 or would you rather get me to give you $12,000?
Reese Harper: That’s the question at that point because that’s what you’re really doing. If you’re saying, I’d rather make 315 and get that deduction, then make 415 and not get the deduction.
Jonathan VanHorn: Do you think people understand that or do you think you’ve had to-
Reese Harper: No. They don’t.
Jonathan VanHorn: They don’t because-
Reese Harper: I think it just feels like there’s this magic number and I’m just, I want to make 20% tax savings. Right?
Jonathan VanHorn: Right. Yeah. That’s where the education comes in, that’s where being … understanding how taxes work, what a marginal rate is, what an effective rate is, and understanding that it’s always better for you to go and make the money and get to keep it and then pay taxes on it, than it is to get a deduction, and then question mark, question mark, question mark. Because you pay less in taxes, you’re always going to be better off making … If you have the two choices, you can either go make a bunch of money, have reasonable expenses, and then pay taxes on what’s leftover, or you can make no money, and then just pay just expenses to where the point where you’ll say that you made some money, and then you’ve spent the same amount in expenses. You had none left over, and you had to pay none in taxes, which of those two options would you take? You’d take the one where you made money, right?
Reese Harper: Yeah.
Jonathan VanHorn: And it’s the same thing. You always want to try, and make money, you always want to have net income, and then you want to have smart tax plan so that you can limit what you pay in taxes. I know it’s not fun paying the government for taxes, and in the end that goes to things like our military, and it goes to the social security and medicare, and it goes to veterans benefits, and all those types of things. And a lot of the times you don’t see where that money is going. But that’s the way I always say, is that’s just the price to play here in the US. We’re afforded a lot of really cool things in the US including entrepreneurship, and taxes are basically the way that we pay for that right to do that.
As far as circling back to the question of should you ever … Because the essence of the question I guess is should you ever try to make less money so that you can pay less in taxes. And the answer is no, because taxes are a percentage of the dollars you’re receiving, right? If somebody were to just give you a dollar, after dollar, after dollar, and at some point they’re like, I’m going to start taking 10 cents of every dollar that I give you, but I’m going to keep giving you a dollar. And then at some point after that I’m going to start taking 20 cents out of every dollar. You would still seek taking that money. Right? And then they say, after a certain while I’m going to keep taking another ten cents away. It gets down to where you’re only getting to keep 60 cents out of every dollar that I’m giving you. Would you keep accepting that dollar?
Reese Harper: Yeah.
Jonathan VanHorn: The answer is obviously yes. You will accepting it over and over again. And you’d be a better position than the dollar prior, every single time. Let’s say you make 200,000 a year as a practice owner or you’re an escort. Well, if you’re taking a $100,000, we’ll say you take 100,000 in payroll, and then you have $100,000 in business income, well guess what? That 20% deduction that we talked about for the business is only on the $100,000 in business income. Your wages are not a part of that. It’s after your wages.
Reese Harper: Yeah.
Jonathan VanHorn: You can only get a 20% deduction on 100,000, which is a $20,000 deduction. But if you weren’t to payroll yourself, you’d get $40,000 as a deduction.
Reese Harper: Yeah.
Jonathan VanHorn: Because you wouldn’t have the payroll in there. You’d have 200,000 in income now.
Reese Harper: Yeah. If you were just an LLC and you weren’t an escort or you didn’t elect to file as an escort, then you’d just get a larger deduction.
Jonathan VanHorn: Exactly. And to be honest with you, the math makes it where they are almost the same now. Where the escort almost doesn’t make as much of a difference anymore if you’re below that 315 threshold. If you’re above it, it makes a ton of difference. And there are specific cases where we’ve seen it go one way or the other based off of the state that they live in, based off of the amount of income that they have. There are other factors that come into play because they may live in a state that has high state income taxes where the escort pay is treated in one way and the LLC is treated on another way.
Reese Harper: Yeah.
Jonathan VanHorn: That may come into play there. The 315 number, the reason we keep coming back to that, that again so sorry about the beginning of the conversation, 315 is the taxable income. It’s the income from all sources minus your deductions as a person.
Reese Harper: And that’s the point that it starts phasing out. But you could have that $50,000 of income or $100,000 of income, you’ll still get that 20%. It’s just it phases out at the 315 level. It’s not an entry point. I’ve had some people call in or email in or text in saying, I’m trying to get my income up to this threshold so I can get the 20% deduction. And so I don’t think that they understand that that’s the beginning point for the phase out. It’s not a starting point for the deduction.
Jonathan VanHorn: From $0 million in taxable income to $315,000 in taxable income, you get 100% of the 20% business deduction.
Reese Harper: Yeah.
Jonathan VanHorn: From 315,000 or 316,000 to 415,000 you’ll get a decrease in 1% at for every thousand dollars. So at 365,000, and which is 50,000 more than 315, you get 50% of the section one 199A, which is the 20% deduction, which you could also say is a 10% deduction at that point.
Reese Harper: Another question that came up as part of this was, and this is early in 2018, and I want to get your opinion on this, I had several CPS call me and say, hey, Reese, I think even though maybe it wasn’t this way in previous years because of this 20% deduction that my clients can get, I might want them to do, maybe they should look at doing a defined benefit plan this year, a larger retirement plan contribution in order to get their income down to the point of where they still qualify for this significant deduction.
For those of you who aren’t familiar with defined benefit plan, it’s think of it like a really souped up 401k where you can just put more money away. Okay? You can get a bigger deduction away into retirement plan for yourself, and have to match a little bit more for staff, but for a lot of people, this can make sense. The thing that came up in this conversation though is I was having it with the first person that called. This is I probably had this three or four times that I can recall. And one of the conversation, the first time it came up as I was noodling through it, this was February or something, maybe it’s pretty early on after we knew what the numbers were going to be, and I was thinking oh, that could make some sense.
If we can get someone’s income down, that’s just like another bonus of why you’d want to do a large retirement plan contribution. But then I started thinking really quickly after I had heard that, I was like, but what about the payroll tax that will have to incur to pay someone a higher salary? Because when you go to a defined benefit plan, sometimes you move from, let’s say you’re at a 100,000 plus salary and you’ve got to move clear up to 265, which is the maximum for defined benefit plan. Then you’re incurring medicare surcharge tax and other payroll related taxes that start offsetting the benefit of the 20% deduction that you might’ve gotten by lowering your income. Give me a sense for whether you’d been through those mental gymnastics. If that came up ever.
Jonathan VanHorn: I’m a business CPA. We look at the business side of things. We’re looking at how much this business is generating as far as income goes. And we can understand we didn’t help them with or we don’t understand their liquidity inside of the business. We understand how much the owner is making off of this. And that is where our process usually is. And the reason is that we’re not financial planners and it’s not what you want. I like it that way because I know financial planning and I think it’s a lot of work. And I know our firm, we have 10 employees. We’re not really set up to help people with that. And based off of the specific example that you gave usually comes down to if they are not already at 265 or if they’re already at 265, that’s easy to do as far as their wages.
Reese Harper: Yeah.
Jonathan VanHorn: But if they’re at a hundred and they’re going to go to 265, what happens is that, that 199A, remembering the example I gave, you only get 199A assuming you’re an escort, on your business income. You don’t get it on your W2 income that you’re paying yourself. If we spend all this money down to 315 as your business income or it would probably be more than that because you have some itemized deductions. We’ll say 340. And you’re pay rolling yourself 265 or 340 minus 265 equals $75,000. You only get 20% of $75,000 as your deduction.
Reese Harper: Okay. Let’s go to a couple more before we wrap up. I’m going to put you through a quick lightning round. Okay?
Jonathan VanHorn: Sure.
Reese Harper: This is our final wind down. Should I hire an associate or keep going on my own?
Jonathan VanHorn: The answer is always going to be, it depends on your capacity. The hiring of associate is a capacity expander. If you’re not at capacity, if you’re not busy or you don’t see capacity shrinking up in the very near future, there’s no real reason to hire an associate.
Reese Harper: Do you have a number you’d throw out there that is this is what the capacity looks like for me when you’re trying to smell it out?
Jonathan VanHorn: It’s never a dollar and cents perspective. One of the things that I’ve learned as being in the dental industry is that you can’t just peg a number against most things. And the reason is, because every practitioner is different in how they have their clinical philosophy set up. One patient and one person will not be the same to the other. And since that’s the case, then production is always different. There are people that may need an associate at $1 million in revenue, and there’s some, maybe some that don’t need it until they’re at 2 million a year in revenue.
Reese Harper: Okay. I have three loans. I have a student loan, I have a practice loan and I have a mortgage. All of them are at 5%. Which one would I pay off first?
Jonathan VanHorn: It’s still usually student loan first, home loan second, business loan third. It’s usually how it goes depending on the terms of each. Now, if you’ve got a business loan that is a shorter term than the home loan, you might be able to make an argument that the cash loan would be better. But your home loan is harder to get any benefit from now than it was last year because of the new tax law.
Reese Harper: Let’s pivot to that a little bit though. The math that we’ve been throwing around there I’ve seen floating around as if my home loan is more than 750,000, the interest on that loan is not tax deductible or not itemizable. Is that correct?
Jonathan VanHorn: It’s something around that. They threw a bunch of numbers around and I’ll have to … It’s escaping me right now. For some reason I thought it was a million, but that may have been they may have changed that in the last compromise when they went back and forth between the Senate and the house.
Reese Harper: Okay. But it’s in that. I might be wrong too. It’s somewhere between seven 50 and a million. It’s a high balance, but if your loan is above that amount, I mean you’ve never had to file a return yet for a client with these new laws. And so I don’t blame you for not knowing any of this.
Jonathan VanHorn: And we’ve done plenty, but we have so few clients that have that as an issue. Really the math comes down to on the standard deduction’s $24,000. Okay?
Reese Harper: Yeah.
Jonathan VanHorn: Which means that we’ve got to get it over $24,000 in itemized deductions to itemize. If the government gives you one or the other, either the standardized or you choose to itemize. And it used to be really easy to itemize because we’d be deducting our state income taxes. Well, now the government says you can only deduct up to $10,000 of the combined state income taxes, real estate taxes, and property taxes. So that caps out at $10,000, which basically means between charitable contributions and mortgage interest, you’ve got to have more than $14,000 to get any benefit at all in those two expenses. It’s how it usually happens. If someone has only 10,000 in mortgage interest a year, which is not uncommon in many areas of the country other than the very expensive metropolitan areas, which unfortunately I’m a part of, then that person may not be automizing. If that’s the case, then the home loan’s really doing nothing for them.
Reese Harper: Not just from the business, that’s personal as well.
Jonathan VanHorn: Personal. These are personal deductions we’re talking about.
Reese Harper: Okay. Because you said earlier most business owners will hit that. What did you mean by most business owners will hit that?
Jonathan VanHorn: They will typically pay in more than … To give an example, they’ll probably pay in … Let’s say that they’re paying in $40,000 in state income taxes throughout the year, and they’re at tax estimates, they pay $5,000 for real estate taxes, and they pay $2,000 for property taxes for a boat and a car. Will they pay it in full? It’s just because of the state taxes they’ll hit it. I mean because of that state income tax, they’ll hit that.
Reese Harper: And that’s $47,000 they’ve paid in for these taxes.
Jonathan VanHorn: Yeah.
Reese Harper: They’re only going to get to write off as a deduction, $10,000 of that group.
Jonathan VanHorn: Yeah.
Reese Harper: So it’s 10,000.
Jonathan VanHorn: That’s significant. I mean, that’s a significant change.
Reese Harper: That’s the thing. And then when you think about how the standard deductions or itemized deductions work, the government says you get either a standard deduction or an itemized deduction. You get to choose. We’ll give you $24,000 as a married couple. It’s 12,000 if you’re single.
Jonathan VanHorn: We know to our goal and to itemize it means we have to get over 24,000 in deductions. We know we’re going to hit 10,000 in almost every case. So yes, we’ve got between 10,000 … What’s the difference in 10,000 and 24,000? It’s 14,000.
Reese Harper: 14 large.
Jonathan VanHorn: That’s where we got to get past in order to be getting any benefit from our deductions. And the things that those [inaudible] can be are charitable contributions, mortgage interest and-
Reese Harper: [inaudible].
Jonathan VanHorn: Yeah. You said the $40,000 or $30,000 in mortgage interest. Well, yes. You went from 10,000, you’re at 10,000, we know you’re going to get 10,000 because you’re a business owner. You take 30,000 in your mortgage interests, you now have $40,000 in itemized deductions. 30 plus 10. If you’re having to choose on what do I want to write off? 40,000 or 24,000? You’re going to write off the 40,000. If you think about it, that $30,000 in interest really isn’t giving you $30,000 in write offs. It’s really only giving you 16 because it’s bringing you from 40 to 24. You’re choosing 40 instead of 24 so you’re really only getting 60% of the deductions that you think you’re getting.
Reese Harper: Yeah. This is an interesting topic because you get this one a lot probably as a CPA [crosstalk]. And I was surprised last week on a social post, I drew a picture and I said, which one of these three loans do you pay down? I asked the same question. You gave me the what I believe is the right answer right up front, which in most cases is going to be student loan debt because it’s just not a tax efficient debt. Yeah. For those of you who don’t know, you don’t get to deduct. I think it’s $2,500 a year total is the maximum interest you can deduct. And that also phases out probably at most of your income level. You get zero benefit from that. But man, I had a hundred comments back on this post. More than a hundred. And I don’t think that maybe 20% of them said student loan. Maybe. It blew my mind. I thought that was an obvious-
Jonathan VanHorn: I mean I guess it also depends on if it’s the pay as you earn, or whatever it is. But to me, if you’re doing things right in dentistry, those things, you’re making enough to be outside of the income thresholds to where you just have a payment, right?
Reese Harper: Yeah.
Jonathan VanHorn: You’re doing things right. You shouldn’t be trying to gain the system of how you can get out of getting it [inaudible] after x number of years or whatever it is. I think you actually shared a post somewhere talking about some scam. Some guy who is running about setting up a not for profit and having you be the only employee, and then getting all public service repayment thing. I was like, come on guys, just pay your loan down. Make tons of money and pay it all off and then you’ll be much happier.
Reese Harper: Okay. Well, I’m almost done with [crosstalk].
Jonathan VanHorn: That was a really good talk. I was really happy that I ended that in 30 seconds flat.
Reese Harper: 30 seconds? I took it a little longer. Okay. Last two. Is it possible for me to … Right now the stock markets very expensive. Okay
Jonathan VanHorn: Is it?
Reese Harper: I’m worried about it as an investor. As an investor, I’m just putting myself in the shoes of a-
Jonathan VanHorn: [inaudible].
Reese Harper: A client. I want to get out of this market for a while and wait for it to cool down, and then I’ll get back in. Do you think that’s a good idea?
Jonathan VanHorn: I mean, I’m not a financial advisor.
Reese Harper: I know. [crosstalk] I’m asking you your own opinion. It’s your opinion as a [crosstalk].
Jonathan VanHorn: My own opinion is that it’s really a very high number right now. I feel that the smart thing to do is to do what history has told us to be the correct answer, which is to just keep dollar cost averaging, which means to keep paying in as you go. Just keep doing it now. Don’t overextend, don’t over leverage, which means have some capital available. But keep investing because the worst thing that can happen, I mean, it was really expensive at 12,000 now. Right? It was double the year before, almost triple I think at some point. And if you sit on the sideline for that, I mean, the market’s are rational.
The market will go on with or without you. It doesn’t care about your million dollars if you got ready to be sitting on the sideline. That money is inconsequential to the market. To me, the smart thing to do is to keep on chugging and keep on going through. Keep investing.
Reese Harper: If somebody calls in and says, I want to just sell all this stuff and move to cash for a while for it to cool down. I mean, you’re not going to, obviously you don’t tell them that. They probably don’t call you with that question that often. But if they did, you’d say … You’d be cautious at least. That would scare … You’d be like, I don’t know, man. That’s not what I read in the book.
Jonathan VanHorn: I would say you should talk to your financial advisor. And my malpractice dictates me say that I am not a financial advisor. But that I still invest the money that I invest every month. I invent the same amount of money. And I just keep it in there.
Reese Harper: Sometimes I feel like I’m at the craps table and I’m just kissing the dice and they’re throwing the money away.
Jonathan VanHorn: But that’s what history has said has been the best disciplined thing to do over the long term. I really would like to be smarter than the market. I know that’s not the case though. And I know that’s the case for pretty much everybody. You never know what’s going to happen. Keep doing what works.
Reese Harper: Okay. Next question. Next question is my friend told me that I should set up a management company, a C Corp in order to run the management operations of my single dental practice. Okay? Topic, one, 30 second answer. Is that good? Is that bad? I need to set up a management company. It’s a C Corp because then I can take advantage of all these cool deductions.
Jonathan VanHorn: Everything was, I guess, fine up until you said all these new deductions. Really, the only deduction you can get as a C Corp is you can write off some extra life insurance, which is not very much. I mean it could be $100 a year or something like that. The best thing about setting up a C Corp is that you’re going to pay your CPA more money, which is great for us. It doesn’t really do anything from a tax planning standpoint. It’s actually a really bad idea in the vast majority of cases. There’s just no reason to do that. There’s some people out there that talk about all these cool things to do, and I’ll tell you most of those people don’t know what they’re talking.
Reese Harper: Okay. Next thing I disagreed with you and I set up a C Corp because I thought it was awesome. Now I have it and my friend has a captive insurance company that he set up. I make $500,000. I’m a GP. Okay? 500 to 700. I’m a high income earning GP. I’m going to take $300,000 or $400,000 a year and put it into a captive insurance company because then, one day I can take it out and just pay capital gains tax only, and I can arbitrage the system. And it’s this cool tax planning strategies. Has that ever been asked? Have you ever been asked that question? Does that ever come up?
Jonathan VanHorn: Yeah, sure. I mean, I know what a captive insurance company is.
Reese Harper: Is that good or bad?
Jonathan VanHorn: We’ve talked to some captive insurance companies that are willing to stand by through audit. What’s going on. They usually cost about $200,000 for you to use their services or something like that. It was really expensive. I think there were some lower cost ones that were $20,000 to $50,000, but they wouldn’t-
Reese Harper: I’ve seen 40,000. Yeah. Plus. In that range best case scenario.
Jonathan VanHorn: And they really didn’t want much. They would say even they [inaudible] we had said until you get up to over a million in net income, the math doesn’t usually help make a whole lot of sense because you’ve got to pay for audits for the insurance company, and you got to do all these other things too. It’s really expensive.
Reese Harper: Okay. So last one is, My friend said that I should take my money and I can put it into this cash value life insurance policy, and that it gives me some great tax benefits and longterm I can borrow money out of this thing tax free. And it will work out really good for my retirement. Do you have any opinion on that personally or have you seen that happen? Just curious if that comes up in questions people ask you.
Jonathan VanHorn: Yeah. The question becomes as … Yes, you can borrow money from your policy. The thing is though, is that what is the cost of that? What is the capital outlay you have to spend to get to that point? And that becomes a personal financial investing question at that point because they you can’t ever borrow it the day after you put it in there. Right? Now you could, if you did some super overfunded one, but then it would be a diminishing return type that wouldn’t be able to borrow all of it back. I mean, yeah, you can do that if you want to. It’s just the question becomes as, is it a good financial investment? Is that a good financial plan for you? Is that a part of your overall financial plan in general? And for a lot of people in this income tax bracket, a lot of the times it doesn’t make a whole lot of sense from the math that I’ve read about it.
And the reason is, is because you’re really borrowing from your death benefit. The cash value, a lot of the times it doesn’t carry over to the death benefit. If you do die, the cash value a lot of the times is a little bit misleading because even whenever I’ve had just people asking me to buy a whole life insurance or whatever you want to call it, they talk about the cash value and I’m like, oh, that’s great. And then all of a sudden you find out a lot of the times the cash value doesn’t go towards your death benefit. It’s just a death benefit and there’s a cash value. You can only borrow from the cash value. And then when you die, it gets taken away from your death benefit but you don’t get the cash value. So it’s an odd thing.
Reese Harper: I appreciate you sticking your neck out there and in a few areas that aren’t your typical comfort zone. It’s great to know that someone is candid and has good opinions that they’re willing to share and not be like, I’m holding anything back. You’ve been really gracious with your time and super generous with your advice. And I just thought we would give you the last word to be able to leave the listeners with any final parting thoughts that you have.
Jonathan VanHorn: Yeah, just always understand that being a business owner, paying taxes, they go hand in hand. Hopefully they go hand in hand because if you’re not paying taxes, and you’re a business owner, that means you’re not making any money. You got to learn how to make money. Once you make the money, then you have to understand what you’re going to do with that money. What is your goal as a person? And that’s why should have a really good financial planner that will help you figure out how to get to that point. How much do you need to be saving every month? Because as a business owner it doesn’t … it’s not always static. It fluctuates commonly. You have to have the plan, you have to have the discipline to follow through with it, and you have to understand the different pieces of it.
And taxes, they play a big part. We find that active tax planning can save people in the tunes of tens of thousands of dollars a year in taxes, which over the course of the lifetime of a taxpayer, and if you’re in a high tax bracket, that it can be millions of dollars by the time you retire. And you need to have a really good CPA on your team. You need to have a really good financial planner on your team. With the CPA, you’re going to be saved. Increase that number of dollars. You get to take it down to your personal bank account, and your financial planner’s going to help make sure that you at the end of the day whenever you hang up the loops at the end of the day, you’re going to be able to actually retire and have some of that money hopefully or have a big number there to be able to retire with.
Make sure you guys are taking care of it in that way, whether it be somebody that’s local or national, like our clients do with us. If you want to know more about our company, you can go to dentistmetrics.com. D-E-N-T-I-S-T-M-E-T-R-I-C-S.com. Find out more about our firm, more about our team, how we … How our philosophy around practice ownership and taxes and accounting and understanding your business and all those types of things goes. You can also email me, firstname.lastname@example.org, and be happy to answer any other questions or … And believe me, I know this is one of those … This conversation, if you’ve made it all the way to the end of this conversation, I’m really, really proud of you first of all because man, while Reese and I are having a really good time, I know there’re people out there who are probably like, man tax is wow. There’s a lot to it.
If there’s any follow ups you need, reach out to me. I’d be happy to be able to answer any questions for you. And if there’s any clarifications or anything like that, then I can be a resource for that too. And I’m on all the social medias, go into our dental Facebook group or something like that and you type in my name, it’ll probably pop up as somebody that can be tagged.
Reese Harper: Okay. Jonathan, thanks so much. We’ll put all your contact information in the show notes and link to your website. I just wanted to say thank you again for taking the time, and we’ll look forward to seeing you in little rock soon, man. I was just checking out my nonstop flight options while you’re at closing out there to figure out when I can make it in the sit down. I look forward to seeing you soon.
Jonathan VanHorn: [inaudible].
Ryan Isaac: Our thanks again to Jonathan Vanhorn for a great conversation. Be sure to check out his podcast called start your dental practice. You can also learn more about his firm, dentistmetrics, at dentistmetrics.com. Before I let you go, I want to remind you to join the Dentist Advisers discussion group on Facebook. To sign up for free, go to dentistadvisors.com/group. It’s an easy place to post your questions about personal and practice finance, and interact with a dynamic group of other dentists. We’re having a lot of fun doing it and we hope you’ll get involved. To book a free consultation with Dentist Advisors, go to dentistadvisors.com and click the button that says, book free consultation. You’ll find a time on our calendar to talk with one of our dental specific advisors who will learn about your situation, and explain how our system can put you in control of your finances. Have a great day, and carry on.Taxes, Debt & Financing