Accounting Tips for California Dental Start Ups from a Dental CPA

It is common for most new business owners ( and not only dentists) to delay setting up their accounting. First year is usually overwhelming and is full of costly mistakes. In most cases it makes sense to find a dental CPA from the very beginning, but for DIY people out there, here are some accounting tips that will guide you in the right direction:

Choosing the Right Business Structure for Dental Startups in California

Here is a twist for California and I am sure you heard about it: dentists in California are not allowed to form LLCs. They can only act as a sole proprietor or as a corporation. And here’s another twist that you all probably know: insurance companies prefer that you operate as a corporation. But let’s consider both options regardless.

Sole Proprietorship: Simple and you can handle everything yourself.

Starting a dental practice as a sole proprietor is the simplest and most budget-friendly option. There is no need to pay California franchise taxes (minimum $800), file a separate business return (projected costs $1,000-$1,200), or pay an accountant to reconcile your books (another $2,000 or so). Your accounting can be done on an Excel worksheet, and there is no need to run payroll and issue payroll forms (another $600). The drawback of the sole proprietorship is the lack of liability protection (no corporation means no protection on the state level).

The other drawback is paying the full amount of self-employment taxes (Social Security and Medicare). For a dentist, a sole proprietorship makes sense when he/she works as a contractor apart from the main job, where most of their Social Security taxes are paid through their employee W-2. There is a limit on Social Security wages one is required to pay (In 2024, this number is $20,906). If the Social Security taxes have already been paid somewhere else, there may be little sense in spending money on the S Corp if it does not save you anything in taxes.

Professional disclaimer: setting up an S-Corp may still be beneficial when a dentist is an employee at his/her main job since the S Corp can help to benefit from the QBI deduction and a California pass-through tax. But this decision depends on personal tax situation of the dental professional and requires accurate planning.

S-Corporation: Complex and you will need help from a dental CPA.

A C corporation offers liability protection since it is a separate legal entity from its owner protecting their personal assets. A C corporation by itself is not good for tax-saving purposes; that’s why many dentists elect with the IRS to have their C Corp elected as an S Corp. With S Corps, protection stays the same, but the dentist benefits from pass-through taxation and a reduction in self-employment taxes. You can read more on the comparison of S Corps and C Corps here. However, S Corps cost more money, as I mentioned earlier. Running accounting also takes more time, as besides bank reconciliations, S Corp owners are not allowed to simply write off mixed expenses, such as cell phone, mileage, and home offices. Instead, S Corp owners are supposed to establish accountable plans and reimburse themselves in a timely manner. We wrote more on accountable plans here.

QuickBooks Online (QBO) vs. Xero: Which is Right for You?

If you have a dental side gig apart from your regular job, software is not necessary. You can either do reconciliations on paper, Excel, or, if you are tech-savvy, you can look into QBO for the self-employed. However, if you are incorporated, you need to pick accounting software since you need bank reconciliations and formal financial statements to prepare your S-Corp tax return. QBO is known for its user-friendly interface, making it easy for those with minimal accounting experience, and it is popular with US accountants and bookkeepers. So, finding a bookkeeper with QBO knowledge should be easy. Intuit also offers a desktop version of QuickBooks, but this means that you will have a hard time finding a bookkeeper since they would either have to come to your office or remotely connect to your desktop.

Xero is an Australian accounting software that is making its way to the American market. In our experience, it is less user-friendly, and a person with no accounting background will have a hard time navigating this software. So, you need to ask yourself if you will be doing accounting yourself. However, Xero is less costly, and many US accountants know it, so finding a bookkeeper for your practice won’t be difficult.

Integrating with Dental Practice Management Software

Most dentists we work with have their dental practice management software. The practice management software does not need to integrate with your accounting software. The accounting software works off your bank statements, and income on the bank statement (no matter where it came from) can be booked as income by your dental CPA. The same logic applies to expenses. There is no need to pick your practice management software solely on the grounds that it can be synced with your accounting software.

Here are the most common dental practice management software we see our clients use:

• Dentrix: Offers comprehensive features for scheduling, billing, and patient records. Integrating Dentrix with accounting software ensures synchronized financial data and simplifies billing and reporting.

• Open Dental: Customizable for managing patient information and financial transactions. Integration with accounting tools facilitates accurate financial tracking.

• Curve Dental: A cloud-based solution that simplifies scheduling and patient communication. Integration with accounting software allows real-time financial tracking.

• SIMPLEX HIMES: Supports various practice management needs. Integrating it with accounting systems helps manage financial records efficiently.

• EagleSoft: Integrates EHR with practice management, offering tools for patient records, treatment planning, and charting.

• Denticon: Cloud-based platform that offers appointment scheduling, patient records management, billing, and reporting.

• Mogo: Comprehensive practice management software with modules for patient scheduling, billing, treatment planning, and electronic health records (EHR).

  
  

Common Accounting Issue # 1: Comprehending Financial Reports

One of the most common challenges in dental practice is reading and understanding financial reports. Dental practices tend to be equipment-heavy. Equipment can be expensed for tax purposes in one year, and your Profit and Loss statement (along with your SCorp tax return) would show a negative amount. However, your cash flow statement would show that cash keeps coming in. This creates confusion and also wrong expectations: next year’s cash flow statement may show the same cash coming in, but depreciation will be depleted, and your profit and loss statement, along with your tax return, will show a huge profit on which you would have to pay taxes.

We see a similar confusion when dentists buy existing dental practices. The tax law allows dental CPAs to amortize ( an easier word for it is to "write off") the dental clinic purchase price over 10 years. The tax law also allows to deduct the interest you pay on the loan. These two expenses (amortization and interest) will be shown on your Profit and Loss statement and your SCorp tax return. However, your cash flow statement will show a completely different picture: it will show your monthly payments to the lender. In most cases, monthly payments to the lender will differ from amortization and interest expenses you will see on your profit and loss statements. Cash flow and profit and loss statements are different creatures, and we often educate our dental clients about the differences between these two.

Common Accounting Issue # 2: Depreciation

As we mentioned above, dental equipment is allowed to be expensed in one year. This can have a big impact on your tax bill, as the expense can wipe out a big chunk of your taxable income. But what happens next year? The depreciation expense is gone, and now the dentist is facing pure profit. That’s why we always talk to our dental clients prior to expensing big items in one year. We feel that they need to understand future tax consequences for upcoming years. Sometimes it makes sense to stretch out the depreciation expense over five years and do not worry about huge tax bills.

Common Accounting Issue # 3: Payroll

Since there is the "reasonable compensation" requirement for S Corps, the dental clinic owner is required to pay themselves before taking out distributions. Of course, you can learn to do payroll yourself, or you could outsource it to professional companies that handle only payroll filings. Among the most popular payroll companies is Gusto. We like Gusto because it allows a CPA to connect to the client’s payroll system and adjust tax withholdings on the client’s behalf. However, this only works for small dental offices. If a dentist hires help, then they most likely need to have a in-house HR specialist in addition to the payroll system software. The bigger dental offices we work with either outsource their payroll and HR department to specialized HR support services or hire an in-house HR person to handle these issues. The reason for this is that they want to hire a competent company that may prevent any employment law issues.

Setting up a proper accounting system and your tax entity is only half of your accounting headache. The other project you would need to focus on is filing taxes and finding legal ways to save on tax. Taxes are complex and have many moving parts. If you ever need help with tax planning, tax preparation, or even setting up your accounting, please keep us in mind. We have several dentists operating as S Corps and have a good understanding of the dental industry. Here is a full page detailing our services. We will be happy to help!