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Okay. So this is Tax Tips for Dentists and I am Jessica Chisholm, CPA here at Huddleston Tax CPAs.
So the things I'm going to go over today are entity selection, the auto deduction, home office deduction, dental equipment, buying versus leasing, which is best for tax purposes, hiring family members, deferring payroll taxes on owners and then just some other miscellaneous deductions to remember.
So first with the business entity selection. When it comes to selecting the best entity for your business. There are several different choices. The different entity choices you have are sole proprietorship, LLC, partnership, C-Corporation and the S-Corporation.
The sole proprietorship is the easiest to start, but it also, you have to pay self-employment tax on all of the profits. For most chairs that's 15.3%. For 2011 with the lowered social security rate would be 13.3%. Then the sole proprietorship it just gets reported on Schedule C of your personal Form 1040. So there's no need for any extra tax returns to be prepared when you're a sole proprietorship.
For the LLC, a single member LLC would be taxed as a sole proprietorship or could make an election to be taxed as an S-Corporation and if you're a multi-member LLC then you need to report income on the partnership Form 1065. So a single-member LLC, when you don't make the election of being an S-Corporation you are just taxed as a sole proprietor and you still pay that self-employment tax on all of the profits. If you make the election to be taxed as an S-Corporation then you get all the benefits of being an S-Corporation for tax purposes and I will talk about the S-Corporation in just a second.
If you're a partnership, there's two or more owners sharing in the profits and losses and you would report your income on the partnership Form 1055 and again, in the partnership income flows through on your personal tax return, K1, so there's no tax paid at the partnership level. But all of that flow through income when you're a general partner is subject to a self-employment tax as well.
Then there's the C-Corporation. The C-Corporation pays tax at the corporate level and then if you're an owner and you take dividends out then you're taxed again on those dividends. So some people talk about double taxation they're talking about C-Corporations and the only way to get money out of the C-Corporation as an owner would be to take a wage or to take dividends and either way you're taxed personally on that income again.
And then there's the S-Corporation. It avoids the double taxation of the C-Corporation because it's also like a partnership of flow through entity so there's no tax on the S-Corporation. All the income flows through into your personal Form 1040 using a K1 and you're taxed on the personal level.
There also is a way to save on the self-employment tax with the S-Corporation. So when you become an S-Corporation the IRS requires you to pay yourself a reasonable wage out of the corporation when you're an owner. So, for example, a way to think about what a reasonable wage would be is what you would need to pay someone to replace yourself in the business. So, if you're a dentist and you have a dental practice, you would need to pay yourself a wage that would be reasonable to pay another dentist to work at your practice.
So the way you would save on self-employment tax is if you had, say, a net income of $100,000 for the year, and you decided that a reasonable wage would be $25,000, then there would be that $25,000 difference between your wage and the profit and you could take that $25,000 as a draw out of the corporation and that $25,000 would not be subject to self-employment tax.
So you have to think about at what point the S-Corporation makes more sense for you. But for more details on how S-Corporations can save you money on taxes John Huddleston, another CPA here, has a webcast called LLCs and S Corps Explained: Using Them to Reduce Taxes, so if you have any questions on entity selection that's a really good webcast to check out because he goes into it in a lot of detail.