Los Angeles Healthcare Dental Tax: Tax Services for Healthcare & Dental Practices

The short answer is that you pay yourself a salary the IRS would call defensible before you take a single dollar of distribution, and for a Los Angeles dental practice that wage figure is rarely small. The S corp structure works because a W-2 wage carries payroll tax while a shareholder distribution does not, so the temptation is to crank the wage down low and pull everything else out the back door as profit. The IRS knows that game cold, and they’ve litigated it for decades. They want reasonable compensation for the actual work the owner performs, and a producing dentist who diagnoses, drills, places implants, and runs the front office at the same time is doing a great deal of work that an examiner can point to.

Here is the mechanics, plain. Your S corp files Form 1120-S each year, the salary you set runs through payroll on a W-2 with Social Security and Medicare withheld, and the rest of the profit flows to your personal 1040 on a Schedule K-1 free of self employment tax. You can read that whole flow on the IRS page About Form 1120-S, and we walk owners through the same return at our corporate returns service. The agency expects the wage to reflect what you would pay an outside associate to do the same clinical and managerial job. The IRS reasonable compensation guidance for officers lives at the S corporation officer wage page, and it is worth reading before you pick a number out of the air.

Work an example with real dollars. Say your practice nets 600,000 dollars after overhead and before any owner pay. You set a wage of 240,000 dollars, a figure a comparable associate-plus-manager role supports in this market once you look at production splits and local pay data. Payroll tax runs roughly 15.3 percent across the Social Security and Medicare bands, though the Social Security portion caps out around the wage base, so the real combined rate on a 240,000 wage is well below a flat 15.3. The remaining 360,000 dollars flows out as a distribution with no self employment tax attached. Now drop the wage to 90,000 dollars instead. You pocket payroll tax savings in year one, sure, but you have handed an examiner a flashing neon target. A reclassification turns those distributions back into wages and stacks penalties and interest on top of the back tax, and the bill dwarfs what you saved.

We see this every year. A new client walks in with a prior preparer who set the owner wage at 60,000 dollars on 500,000 of profit because someone at a weekend seminar said low wage equals low tax. That isn’t planning. That is a future audit with a ribbon tied around it. We fix it by building a wage study, pegging the salary to real associate compensation data for this market, documenting the owner role in writing, and keeping the file ready for questions that may never come but easily might. The documentation is the whole point, because the number you can defend is worth far more than the number that looks aggressive on paper.

An edge case worth flagging. If the owner is winding down toward retirement, working two clinical days a week and letting associates carry the production, the reasonable wage drops because the work dropped. Compensation tracks effort and role, not a fixed percentage someone keeps repeating. A part time owner who still collects large distributions has a different defensible wage than a full time producer, and we adjust the study to match what the owner actually does day to day. Get the wage set right and the whole los angeles healthcare dental tax picture gets a lot calmer in April. If you want a wage study that holds up under questioning, start at our new client inquiry page and we will run the numbers with you before year end.

Most of it, and often in the very year you buy it, which is the part owners like to hear, and it’s worth understanding. When you put a new CBCT scanner, a CEREC mill, a set of operatory chairs, or a digital pan into service, you don’t have to spread that cost over seven years the slow way. Section 179 expensing and bonus depreciation both let you front load the deduction, and you claim them on Form 4562. The IRS page About Form 4562 walks through the form itself and the Section 179 election line by line.

The mechanics split into two tools that work together, not against each other. Section 179 lets you elect to expense qualifying equipment up to an annual dollar cap, and that cap phases out dollar for dollar once your total equipment purchases for the year cross a threshold, which is the rule that protects the deduction for smaller buyers. The 179 deduction also cannot create or deepen a business loss, so it is limited to your taxable income from the practice. Bonus depreciation works differently. It applies after 179, carries no income limit, and can actually run your practice into a paper loss that offsets other income. The bonus percentage has been stepping down from the full 100 percent of recent years, so the exact rate depends on the year the asset goes into service. Always check the current Form 4562 instructions for the rate that applies to your specific purchase year, because that number moves.

Run the numbers with dollars attached. You buy a 140,000 dollar CBCT and digital workflow package and place it in service in December. You elect Section 179 on the full 140,000 because your practice income easily absorbs it. At a combined federal and California marginal rate near 45 percent for the owner, that deduction is worth roughly 63,000 dollars in tax saved, which means the real out of pocket cost of the machine drops well below the sticker price once you account for the write off. Time that purchase for a high income year and the deduction lands exactly where it does the most good, against income taxed at your top rate. And remember that equipment financed on a loan still qualifies for the full deduction in the year of purchase even though you paid only a down payment in cash, so a practice can write off the entire 140,000 dollars while having parted with maybe 28,000 dollars of actual cash, which is a powerful timing advantage that owners routinely overlook when they assume the deduction tracks the payments rather than the placed in service date.

We see this every year. An owner buys 200,000 dollars of equipment in a year the practice barely broke even, elects the full 179, and is stunned to learn the deduction is capped at the practice income with the rest carried forward to a future year. The fix was bonus depreciation, which has no income cap and could have created the loss, or simply timing the buy for a stronger income year. Sequencing the two tools, 179 first up to the income limit and bonus on the remainder, is where the real money sits, and it is a five minute conversation that owners skip because the equipment rep never mentions it.

An edge case for California that bites later. The state does not follow the federal bonus depreciation rules at all and caps its own Section 179 number far below the federal limit. So a buy that is fully expensed on the federal return throws off a large book to California timing difference that you have to track on the state return for years afterward. The asset depreciates slowly for California while it was already fully written off federally, and the two schedules diverge. We map both sets of numbers up front so the California depreciation does not surprise anyone in year three when the federal deduction is long gone. If you are planning a big equipment year for your LA healthcare practice, talk to us first through our new client inquiry page and we will time it to your income on both returns.

It phases out because health is a specified service trade or business, an SSTB, and Congress wrote the qualified business income deduction to fade away for high earning SSTB owners. A dental practice is squarely a health business, so once your taxable income climbs past the threshold, the 20 percent QBI deduction shrinks and then disappears entirely. You compute the deduction on Form 8995 or the longer Form 8995-A, and the IRS page About Form 8995 covers the simplified version of the calculation. The reason the SSTB rule exists is that lawmakers did not want the deduction to become a giveaway for high earning professionals whose income comes from their own skill and reputation rather than from capital and a large payroll, and dentistry, like medicine and law, sits at the center of that intended limit.

The mechanics turn on taxable income, not on practice profit, and that distinction is where the planning lives. Below the lower threshold you get the full 20 percent on your qualified business income with no SSTB penalty applied at all. Inside the phase out range the deduction is reduced on a sliding scale as your income rises. Above the upper threshold an SSTB owner gets zero, full stop, no matter how the wage and property tests would otherwise work for a non SSTB business. The thresholds are indexed for inflation and differ for single versus married filing jointly, so the exact figures shift each year and you have to use the current ones. The broader rules sit on the IRS qualified business income deduction overview, and we model them as part of our tax strategy consulting work.

Here is a worked example with dollars. A married dentist couple files jointly with 360,000 dollars of taxable income, which lands them squarely inside the phase out band for the year. Their practice throws off 280,000 dollars of qualified business income, so a full 20 percent deduction would be 56,000 dollars. Because they are partway through the SSTB phase out, they keep only a fraction of that, maybe half, depending on exactly where they sit in the range. Now suppose they push taxable income down with a larger retirement contribution. The recovered QBI deduction they unlock can be worth more in tax than the contribution felt like it cost, because the deduction comes back as income drops below the upper line. Two levers move at once, the contribution itself and the restored deduction. The same logic applies to charitable giving timing, to harvesting capital losses, and to deferring a year end bonus to associates that would otherwise lift the practice profit flowing to the owners, because every dollar of taxable income you keep below the upper threshold is a dollar that helps restore a deduction worth twenty cents or more on the qualified income behind it.

We see this every year. A practice owner clears the upper threshold by 15,000 dollars of taxable income and loses the entire QBI deduction, tens of thousands of dollars in value, over a margin a slightly larger retirement contribution would have erased completely. Nobody ran the projection in November, so it’s gone, so by the time the return hit the desk in March the lever was already gone and there was nothing left to pull. Planning beats preparation here every single time, because preparation only reports what already happened while the planning could have changed it.

An edge case that pays for itself. If you own the building your practice operates from and rent it to the practice at a fair rate, that rental income may be a separate non SSTB activity that qualifies for its own QBI deduction even when the dental practice itself is fully phased out. The health phase out does not poison the real estate. Structured correctly, with a real lease and proper rent, the real estate piece survives and produces a deduction the practice lost. That is the kind of detail that justifies the planning fee several times over. Get a projection done before year end through our new client inquiry page and we will find your levers while they still work.

California does not march in step with the federal code, so a deduction that lands fully on your federal return can shrink or vanish entirely on the state return, and a Los Angeles dental practice owner feels that gap every April. The state conforms to some federal rules, decouples from others, and runs its own depreciation system, its own Section 179 cap, and its own treatment of pass through income. You cannot assume a federal number carries over to California, and assuming it does is how owners end up with a state bill they never saw coming.

Start with depreciation, the biggest gap for any practice that buys equipment. California does not allow federal bonus depreciation at all, and it caps Section 179 expensing far below the federal limit. So that 140,000 dollar scanner you fully expensed federally under Form 4562, which you can review at About Form 4562, gets only a thin sliver of immediate expensing on the California return, and the remaining basis depreciates over its normal recovery life. You end up tracking two separate depreciation schedules for the same physical asset, one federal and one state, for years on end. The fixed asset register has to carry both, and the difference reverses slowly as the state catches up. Practically, that means your California taxable income will run higher than your federal taxable income in the year of a big equipment purchase, because the state denied most of the immediate write off, and then run lower in the later years as the state depreciation continues after the federal deduction is already finished, so the gap is a timing difference rather than a permanent loss of the deduction.

There is also the entity level tax to weigh, which surprises owners moving in from other states. California imposes a tax on S corp net income at the entity level, charged to the corporation itself, on top of the personal tax the shareholder already pays on the pass through income. The federal system does not do this. So the S corp election that saves real payroll tax federally carries a California cost you have to net against the federal savings before you decide the structure still wins. The S corp framework itself sits on Form 1120-S, described at About Form 1120-S, and we prepare both layers through our corporate returns service, but the California overlay is what changes the math for an LA practice specifically.

Work an example with dollars. Your practice elects S corp status and saves roughly 12,000 dollars a year in federal payroll tax versus operating as a sole proprietor. California then charges its entity level S corp tax of about 1.5 percent on the net income, which on 400,000 dollars of net income comes to around 6,000 dollars. The election still wins on net, but the real benefit is the federal saving minus the state cost, not the headline federal number a seminar speaker quoted you. Run it both ways, federal and California together, before you file the election, because the answer is closer than most people expect. California also charges a minimum franchise tax that applies whether or not the practice turns a profit in a given year, so a brand new practice in its slow first year still owes the state floor, and that fixed cost has to sit in the projection alongside the entity level tax when you weigh whether the S corp election earns its keep in the early years before collections ramp.

We see this every year. A client relocates to California from a no income tax state, keeps the same federal heavy planning their old preparer used, and never accounts for the conformity gaps or the entity level tax. The federal return looks great and the California bill is a genuine shock in April. An edge case worth noting for the right owner, California also runs its own passthrough entity elective tax that can push some state tax above the federal cap on state tax deductions, and electing it saves real money for a practice with the right profile. We model the federal and California returns side by side so there are no surprises in either column. Bring us your numbers through the new client inquiry page and we will run both sides together.

Most associate dentists are employees, not contractors, and getting that wrong is one of the more expensive mistakes a practice can make. California uses a strict ABC test that presumes a worker is an employee unless the practice can prove all three prongs, and an associate who works your chairs, on your schedule, with your staff, your supplies, and your patients almost never clears that bar. Calling someone a 1099 contractor on paper doesn’t make it so. The state and the IRS both look straight past the label to the actual working relationship, and the relationship is what controls.

The mechanics matter because the cost of getting it wrong is layered and it compounds. If you treat an associate as a contractor and the state later reclassifies them, you owe the back payroll taxes, the unpaid employer share, penalties for failure to withhold, and potentially the worker is owed benefits and protections they were denied while misclassified. The IRS side of worker classification ties into the same payroll forms a practice already files for its W-2 hygienists and front desk team, so you’re not adding a new system, you’re just putting the associate where they always belonged. An associate paid as a contractor also has to handle their own self employment tax, which the IRS describes on its self employment tax page, and that surprise at filing time often sours an otherwise good working relationship fast.

Here is an example with dollars. You bring on an associate at 180,000 dollars a year and pay them on a 1099 to skip the payroll setup. Two years later a state audit reclassifies them as an employee. You now owe the employer payroll taxes on 360,000 dollars of wages across both years, plus penalties, plus interest, which adds up to 40,000 dollars or more once it all stacks. Setting that associate up correctly as a W-2 employee from day one would have cost a small fraction of that number and let everyone sleep at night. The cheap path up front was the expensive path in the end, and that’s the lesson, which is how misclassification almost always plays out.

We see this every year. A practice runs the front desk and the hygienists as W-2 employees but pays the associate dentist on a 1099 because that is simply how the seller did it before the sale. The classification was wrong for the same reasons it was wrong for the seller, and the buyer quietly inherited the whole exposure at closing without anyone pricing it in. We clean it up before it ever becomes a notice from the state, which is far cheaper than cleaning it up after.

On retirement, classification feeds directly into what plan you can run, so the two questions are joined. Once your team is properly on payroll, an owner can stack real money into a 401k with a profit sharing component, and a high earning solo or small group owner can layer a cash balance defined benefit plan on top to shelter well into the mid six figures a year in pretax contributions. An edge case to watch, the plan has to cover your eligible employees fairly under the coverage rules, so a practice with several long tenured staff faces different plan economics and a larger employee contribution cost than a brand new solo office with one assistant. We design the plan around your actual roster, not a brochure example. The defined benefit piece in particular rewards an older owner with few employees, because the contribution the plan allows rises with age, so a fifty five year old solo owner can shelter far more than a thirty five year old with the same income, and pairing the cash balance plan with the 401k profit sharing plan lets the right owner move a very large number off the top of the practice profit each year. Classification first, then the plan that the cleaned up payroll makes possible. If you are hiring an associate or sizing a retirement plan for your LA healthcare practice, start at our new client inquiry page and we will map the classification and the plan together.