Unfavorable Tax Change Looming for Dental Practices

July 7, 2010 | Subscribe to our RSS Feed

A recent legislative proposal may put an end to a favorable tax situation for dentists taxed as S-corporations.

Dentists being taxed as S-corporation entities beware; a huge tax hike looms on the horizon.  Included in the bill known as the American Jobs and Closing Tax Loopholes Act of 2010 (now that is getting right to the point) is a provision that would tax S-Corporation net income after all expenses as self employment income.

Currently, only the first $106,800 of dentist shareholders wages are taxed at 15.3% and at 2.9% for wages above that amount.  Any net income after salary and expenses flows through to the shareholder’s individual tax return and are taxed at individual tax rates only.  This proposal would affect dental practices of three or fewer shareholder dentists by making the S Corporation net profit be subject to the 15.3% self employment tax on ordinary income in addition to being taxed at the individual rate.

This would eliminate the situation where a dentist takes an unreasonably low salary to avoid paying Social Security and Medicare taxes on wages and then takes “compensation” in the form of distribution payments.  It was just this type of strategy that helped taxwriters decide it was time to take action against these dentist S-corporation shareholders from gaming the system.

While the law has yet to be passed it bears careful watching due to the large tax bite this will take out of those dentists being taxed as S-corporations.  Ouch!