How to Spend Business Profit

[surfline]

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So, I talked to my dentist back home and I brought up the “low” dentist salary I was told about in school and he told me what happens is dentists report what they get paid as a “provider.”
So, if you own a practice that generates $1M/yr with 70% overhead you will have $300k left over. The dentist will pay himself (say as a W2) $150k of that (which will be taxed and reported for census data) and have the rest as “business profit.”
He then told me that business profit can be used to reinvest in the practice, CE, go on “business” trips, buy “business” meals, etc. and that it is protected.

1) is this legit
2) If all this is true, how the heck do you spend $150k every year on business expenses? That’s a lot of food and traveling!

 

[lp3k11]

It is hard to properly answer your first question, since I am not a lawyer, but you can infer that it is legit since it is possible and something that it is done in many states and countries. The second question is more simple. You can expand your business to more locations/offices, and you can also use those business expenses on postgraduate courses, which means travelling as well. The argument in favour of that type of legislation is that with a bigger clinic you will generate more employment, and eventually it will lead to more taxes-profit for the local government.

Pretty obvious to say that there will be people who will abuse of those regulations.

 

[Saddleshoes]

Yes it is legit BUT...
Your dentist back home gave you the Reader's Digest version. It's a bit more involved.
If you have any interest in private practice ownership in the near future, I would strongly suggest getting some accounting/business training.

 

[ysrebob]

This is conflating two separate issues.

1. If a practice is organized as a corp, then the owning dentist is going to draw some of his/her income out of it as a reasonable wage (ie on a W2 form like any employee would), and the remainder as a payout of corp profits (reported in a different way for tax purposes, technically, but still taxable income).

2. Regardless of how the practice is organized, some elective things (like CE tuition, business-related meals to an extent, and equipment purchases) can be accounted for as costs, which directly reduces profit. This does give an owner some tax benefits over an associate, but it’s not free reign to avoid taxes at will. The “costs” do have to be justifiable as business expenses. The IRS is not stupid.