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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com, or through www.Bryen-BryenLLP.com.
Comparing Donald Trump’s tax to dental practice income and the dentist’s tax.
How much income is needed to have what we think is Donald Trump’s money and no federal income tax?
This article is not a political treatise or any type of endorsement or non-endorsement. Donald Trump’s actual income and cash flow will not be addressed, but the approach to his reported taxable income will be. He employs a system that uses depreciation, as he has stated on many occasions, to substantially reduce his taxable income and his federal income tax.
The approach to legally reduce reportable taxable income by allowing depreciation to flow through from the business income or loss to the personal tax return of the dentist is in essence, a similar concept, on a much smaller scale that is used by Donald Trump to dramatically reduce his federal income tax liability. He does this by allowing the depreciation accepted by the Internal Revenue Service to create tax losses within his business ventures that appear on his personal tax return. Those assets that he built or acquired are hoped to appreciate in value. The depreciation affords Donald Trump a deduction against his regular business income for income tax purposes. Had the deduction not been taken, the earnings that were lessened would have been taxed at the highest federal tax rate.
When he sells those assets, the appreciation in value of the real estate less his net cost is taxed at the capital gains rate. That capital gains tax is at about the lowest percentage an individual can receive. Those with high income tax brackets use large amounts of depreciation to reduce business income and therefore report little to no taxable income. Many dentists do have high dental practice income and are in the highest or close to the highest federal income tax bracket from the dental practice earnings.
How does this compare to a dental practice and the owner, while practicing and when transitioning the practice with a sale?
Many dentists and their advisors understand what depreciation is. They use it when equipment is acquired. Congress has passed legislation where purchases of certain assets are allowed to be depreciated quickly. Items such as CEREC machines, as an example, which cost up to $150,000 or more, can be written off under certain circumstances, against the practice revenue immediately. The result can be that $150,000 of taxable income appears as zero profit. A difference between the Donald Trump approach with real estate and the hypothetical CEREC acquisition is that the equipment will probably not appreciate in value as the real estate most likely will over a given time frame.
Some dentists do acquire the real estate in which their dental practice is housed. That purchase can be depreciated in a manner similar to Donald Trump’s for set offs against personal income tax. Using a concept known as cost segregation depreciation, which he may or may not use, the real estate may have the opportunity to be depreciated much more quickly than most dentists realize. The result employing cost segregation depreciation is an even faster tax write off that assists in indirectly reducing dental practice income. If structured properly, the reduced income or no income from the dental practice will flow through to the dentist’s personal tax return and will result in no personal federal income tax or very little.
A comparison between a dental practice transition and Donald Trump’s real estate
Donald Trump’s real estate, based on the real estate market at the time of sale, will appreciate in value and allow him to report a capital gain for possibly the lowest federal tax rate available. For the dentist, a similar situation may occur when his or her dental practice is sold and if properly structured, the same low capital gains rate, or potentially one lower than Donald Trump’s, can be reported on behalf of the dentist. The real estate, if owned by the dentist, also presents the low capital gains rate to the dentist upon a sale if the value has appreciated compared to the net cost to the owner.
Who assists in these sophisticated approaches to substantially reducing the taxable income of Donald Trump or a dentist?
Donald Trump may employ a cadre of expensive attorneys and accountants to help him with his business and personal planning. For the dentist, an excellent approach is to retain a dental CPA with experience in assisting with planning for current tax write offs based on equipment and real estate acquisitions, as well as the sale of the real estate and dental practice.