In this episode of The Art of Dental Finance and Management podcast, Art meets with Mel Schwarz, JD, CPA, Director of Legislative Affairs in Eide Bailly's National Tax Office. Art and Mel discuss the various tax legislation influencing dentists’ year-end tax planning and how to best minimize tax liabilities.
Some tax considerations include:
- Employee Retention Credit (ERC)
- Inflation Reduction Act (IRA)
- Energy efficiency incentives
- Recognizing capital gain
- Retirement plans
- Tax rate increase
- Depreciation of equipment and vehicles
- And more
Reach out to Art if you have any questions regarding dental finance and management for your dental practice. More information about the Eide Bailly dental team can be found at www.eidebailly.com/dentist.
Being more strategic in all aspects of your dental practice will lead to increased profitability.
Show Notes and Resources:
- Eide Bailly’s Dental Practice
- Eide Bailly’s Tax Services
- Decisions in Dentistry magazine
- Academy of Dental CPAs
- Year-End Tax Planning
Art Wiederman, CPA: Hello everyone and welcome to another edition of The Art of Dental Finance and Management with Art Wiederman, CPA. I am your host Art Wiederman. Welcome to my podcast and I am proud to say that as of two days ago, because we're recording this podcast on Monday, December 5th, and it will be published on Wednesday, December 14th, to give you some ideas about our topic today, which is very timely.
I am celebrating my fourth anniversary of doing this podcast. The first one I did was with my dear friend Alan Schiff, who is the president of our Academy of Dental CPAs in Baltimore, Maryland, on December the third of 2018. We are now, I think, at about 165 publications and thousands of people that listen every month. And thank you. Thank you so, so much for your trust and faith with in me and the information that we're providing.
And today, we're going to have a very, very timely topic. It is our annual Let's save you some Money on Taxes podcast. And I couldn't have a better partner in crime and guest than my good friend Mel Schwarz, who is the Director of Legislative Affairs for Eide Bailly, the firm that I am affiliated with. I am a dental division director at Eide Bailly and Mel has 38 years of experience. Will tell you a little bit about him in a moment. The great thing about being with Eide Bailly, which I did not have access to before I was part of Eide Bailly, is that Mel has his ear to everything that's going on in Washington. What kind of new laws are coming out, what are they thinking about for year-end, what secure 2.0 are looking like? We'll talk about all of that today and you're not going to get any more updated information as far as what tax legislation looks like than you are on this podcast. I have no problem saying that, folks.
So before we get to Mel, I want to share a couple of things with you. First of all, please, please go on to the website of our wonderful partner Decisions in Dentistry magazine www.DecisionsinDentistry.com. The best clinical content that there is in the dental profession. The top clinicians from all over the world covering up to date clinical topics as well as 140 continuing education courses at a very very reasonable price. Go to www.DecisionsinDentistry.com.
My mothership is the Academy of Dental CPAs, 25 CPA firms across the United States that represent over 10,000 dentists. I was a founding member of this group. We have 46 offices in Eide Bailly in the western United States and work in those neighborhoods. I happen to be in Tustin, Mel happens to be in Washington just because that happens to be where the government is, and it's probably a good place for him to be. He's not in the western United States. Their website is www.ADCPA.org.
So I wanted to let you know that I'm going to be having some dates for you folks in California. I am working with my good friend Katie Fornelli, who is the management consultant extraordinaire that works for the California Dental Association. And the California Dental Association is making a huge effort to help young dentists that are just starting out and either looking at their options of starting a practice or buying a practice or going into corporate dentistry. And we're going to be doing live seminars, two of them in Southern California in March and two of them in Northern California, I believe in San Jose, in Sacramento in June. In addition, I have been told that I will be presenting both at the Southern and Northern CDA Conventions. So if any of you guys want to take a vacation from out of California into California, the CTA South is in May and the CTA North is usually in September. They're changing the CTA North from San Francisco at the Mosconi Center to somewhere in San Jose. I don't quite know where that is, but I will find out because it would be a good idea for me to know where I'm going. And so we'll give you some dates and topics coming up shortly on that.
So let me get to my good friend Mel Schwarz. Mel is an invaluable resource not only for me, but for our entire firm at Eide Bailly. He has incredible experience. And again, as I said earlier, you just don't get this kind of information unless you have somebody sitting there and talking, you know, to the folks in Washington, talking to Nancy Pelosi's office, talking to Chuck Schumer's office and the folks on the House Ways and Means and the Senate Finance Committee. So Mel has over 38 years of experience specializing in legislative affairs, including development and implementation of tax legislation at the national level. He spent six years on the staff of the Joint Committee of Taxation and has served as the Chairman of the Tax Legislation Committee of the American Institute of Certified Public Accountants. He oversees Eide Bailly's monitoring of federal tax legislation and the regulations implementing that legislation and shares that knowledge with the firm and its clients. And he is a very much sought-after speaker for many AICPA, TCI and FCA conferences. And of course he is much smarter than your host, which is why I have him on. Hi, Mel. Welcome to the Art of Digital Finance and Management.
Mel Schwarz: Well, thank you, Art. And I wouldn't I wouldn't shortchange your knowledge here, Art. I think that I learn many things as I participate in these podcasts with you. And it's it is always a pleasure to be a part of this.
Art Wiederman, CPA: Well, you're very, very kind. And I think this is the second or third time you've been on the podcast. And I mentioned a little bit about your journey. Tell us a little bit about your career before we get into all the great stuff we're going to tell our folks on the podcast today.
Mel Schwarz: Oh, it is not a typical Washington, DC story. I came in the summer of 1984 on a one-year tour of duty and never went home. I did marry a local, so I have that to argue for and but that's the background. I was fortunate enough to spend the time on staff, the Joint Committee on Taxation, which is it is a shared staff for the Finance Committee and the Ways and Means Committee, the two tax-writing committees in Congress of essentially technical people not intended to have necessarily a partisan push, but one that can go through can keep track of how the changes that are proposed in legislation can interact with what is already in the Internal Revenue Code, for instance. We're also the ones who publish the revenue estimates, which you may have heard referred to in the popular press. And although I was not one of the economists directly responsible, I was one of the attorneys accountants responsible for explaining to the economists what does it mean.
We completely blew the estimate. I guess, at least partially my fault.
Art Wiederman, CPA: That's right. Now, isn't there something in the tax law, Mel, that says that any time they put in a provision that cuts revenues, they have to have a supporting provision that raises revenues, or does that go away?
Mel Schwarz: Now that that is part of the budget process, so that if you're going to pass tax legislation, for instance, in the context of budget legislation, typically they require that there be offsetting revenue raisers. That's not a firm and fast rule, although I think there have been past chairmen of the Ways and Means Committee that have complained that the rest of Congress figures out how to spend the money and that it sends the bill to the tax writers and asked them to come up with the cash. Yeah, yeah, definitely. We've moved away a little bit from that, but that continues to be a concern.
Art Wiederman, CPA: Well, revenue is a concern, especially since our country has over $31 trillion in debt. And I certainly don't see it going down anytime soon. And I'm sure you have a much better handle on that. Let's start talking about well, let's see, today is the 5th of December.
Mel Schwarz: Yes.
Art Wiederman, CPA: Tomorrow, the two folks in Georgia are going to. Raphael is it Warnock. Right. And Herschel Walker, the Heisman Trophy winner from Georgia, they are going to face off in a very hotly contested race. But the Senate has pretty much been decided. If you know, if let's say Warnock is let me get my Democrats and Republicans right. Warnock is a Democrat. Democrat and Walker is a Republican. And right now, we are at 5249 in favor of the Democrats, right?
Mel Schwarz: Yes.
Art Wiederman, CPA: So if Mr. Warnock wins, tomorrow will be a 5149, which gives the Democrats a sliver hairline advantage of doing stuff in the Senate as opposed to what they've had the last two years, which is 5050, where Vice President Harris had to break any ties, right?
Mel Schwarz: Correct.
Art Wiederman, CPA: Yeah. And then the House has got, what is it, three or four in favor of the I think it's three or four seats in favor of was it 221 or 222.
Mel Schwarz: 222 is where we think the number is right now. But it is an incredibly narrow margin. Yeah. In the house.
Art Wiederman, CPA: So with that said, we have a Democratic Senate, a Republican House and a Democratic president. What does that mean for tax legislation? Let's start that discussion.
Mel Schwarz: Well, I think that most people would or many people would simply say it means that nothing's going to happen, that the two sides cannot get together, will not get together. I think that probably overstates or is too pessimistic. There are some things that are popular on both sides of the aisle and very easily could be enacted, could be passed and signed by the president. You mentioned, I think earlier on the issue of some of the retirement changes. Right. I think that's one to very much stay aware of and stay focused on whether we can get to the bigger questions of things like when the debt when the Republicans passed the Jobs Creation Act back in 2017, a number of things were included for the convenience of the revenue estimates, because they didn't have to be revenue neutral. They didn't have to hit zero, but they did have to hit a target. And so to hit that target, they included some things, some revenue raisers, frankly, that they never intended to become part of the law.
Art Wiederman, CPA: Like what?
Mel Schwarz: Changing the ability of corporations to deduct interest, legitimate interest. Rules with regard to whether you get to deduct or are required to capitalize your research experiment and experimentation. There are some other provisions dealing with taxation more on the individual side that is of concern. And in fact, one of those is a potential rate increase that will occur in I believe it's 2026 if we do not see something happen between now and then. Now 2026 is a ways off. Some of these other provisions already taking effect. For instance, the businesses that engage in research are already supposed to be capitalizing on their research and spare expenses, which no one I think ever really thought would become part of the law. But it has gone into effect. There will be a big push on the part of the particularly House Republicans. To overturn these items, to fix this problem. There will be resistance to that. Part of it, I think, is going to be the Democrats are likely to say, well, you know, you guys wrote the legislation. Why are you asking us to fix it for you now? Yeah, right. Which, unfortunately, is a habit that Congress, both parties in Congress have gotten into. But I think that those are some of the things that we're looking to see. I don't see anything that would be radical in the way of a revenue tax increase being passed really in the next two years.
Art Wiederman, CPA: Now they did say, I mean, President Biden ran. And again, we're not folks, you know me for years now, I mentioned for years, I don't do politics on this podcast. You want to do politics, you can go to any number of political podcasts out there and you can listen to them to your heart's content. But we talk about politics to the extent that it affects tax law. And President Biden ran on the provision that he was not going to raise taxes on anybody who made less than $400,000 as a joint return. Is that what you remember?
Mel Schwarz: That's exactly right.
Art Wiederman, CPA: Right. And so I've heard things and I'm wondering what your comment before we get into some of these details is. So do you think that if you know, if the president wants to get some something, you know, going some tax legislation going, maybe raise rates on, you know, higher income people, which Democrats tend to want to do. And again, not a political comment, just that's what happens. Do you think President Biden might want to horse trade some other non-tax issues to get some of that. Do you think we might see some of that?
Mel Schwarz: That is possible. I think particularly if you're talking about something like a rate increase, particularly an individual rate increase, which I think is going to affect most of the people who are listening here, it's very doubtful that the votes for that are there. There are Democrats who would vote against that. I think pretty much every Republican would vote against that. It doesn't seem to me to be the kind of thing that is likely to be traded. In some ways. Trades that raise taxes and cut spending are very, very difficult to do politically. And there are deals on the table right now. Well, you spin this and I'll spin this and we'll all go home happy.
Art Wiederman, CPA: Yeah.
Mel Schwarz: That tends to be the direction that it's easier to go that direction politically than it is to take the harsh medicine of either cutting spending, real cutting spending or increasing taxes. So I don't see that. I don't see I mean, maybe if you talked about a billionaires surtax that is a small enough group or a. But I think the millionaire surtax that's going to be a stretch under who has come under who has currently been elected. And I'm not sure I see what they would trade. I mean I don't see what would be traded for that.
Art Wiederman, CPA: Yeah. I don't know, I just, I just kind of heard things about that. But that's why you have your well, that's the.
Mel Schwarz: You know, the guys down here. I think that Biden has shown that he can grasp reality and that sometimes you don't have the votes. Yeah. And that is particularly I mean, a lot of this the next two years are going to be the political side is going to be focused on getting ready for the 2024 elections, both in Congress and the presidency. And those two, the two years before the presidential election, are much harder to enact legislation in than the two years prior.
Art Wiederman, CPA: What makes people who are doing CPA work very happy because, you know, I mean, you and I have both been in the tax profession 40 plus years. And you get to the point where you just say, guys, just leave the damn tax law alone. Let us figure it out before you change it again. You know.
Mel Schwarz: That would be there would be much to be said for that. There would be much to be said for that. I think that the one thing that I will say about the idea of legislation we did mention that I think there is pension legislation that there seems to be some general agreement on. We can talk a little bit about that later or now.
Art Wiederman, CPA: A little bit later.
Mel Schwarz: Yeah, that is likely to move forward. There are various tinkering with things that don't work very well right now that they might be able to get to. One of the things that there are enormous questions about fall in the international area, and it actually may well be that if there is going to be tax legislation, international questions are going to be what sucked the oxygen out of the room and sort of leave the rest of us alone.
Art Wiederman, CPA: Yeah, well, and that is not something that generally affects the folks that listen this podcast we won't get too much into that today. So let's get into some of the topics I want to talk to you about. First of all. We've been talking on this podcast about the Employee Retention Tax Credit for the last two years, and I have been harping on my soapbox here on this podcast, on webinars, and to anybody who will listen to me that there are bad players out there. Mel, you and I have talked about this at length. There are companies I even mentioned on the webinar that you and I did last week. In fact, if any of you want to you know, you really want to learn about tax law. We did a real deep dive on Friday, the 2nd of December. Mel and I in our Business of Dentistry webinar series, which will be up on our Eide Bailly YouTube page probably sometime this week, the week of the fifth. And you can certainly listen to it.
We're not going to get into everything today that we talked about on Friday, but we did talk about the Employee Retention Tax Credit and how this is a credit that there are companies that have sprung up that are literally making illegal claims, calling business owners. I think I mentioned I got a call on my cell phone from a number in Texas and a very intelligent lady called and said, Hello, sir, have you heard about the Employee Retention Tax Credit? And you can get up to $26,000 per employee. And how many employees do you have and wouldn't that be great? And that's how she started out. And I just don't have the patience or the time to deal with that.
But the fact is that there are a lot of players out there that are charging fees of 25 to 35% or more of the credit that are just they're just going to basically set people up for big problems. So, Mel, you and I talked about this and Washington is well aware that, you know, if your goldfish died or you have just had a root canal, that doesn't qualify you for the Employee Retention Tax Rate. So what's the IRS doing about this and what are they saying? I want my listeners to hear this straight, I'm not going to say from the horse's mouth, because that would not be a very nice thing to say to you. And you are my friend. So let's just say from someone who's in the know.
Mel Schwarz: The IRS is targeting this. And this may be one of the items that actually was included in the legislation that passed this year. The tax legislation was significant additional money for the IRS to spend on enforcement. And this is expected to be one of the ways that they spend that money. I mean, it's relatively easy for them to pick out situations and you have to meet very, very specific. You have to make very, very specific rules in order to claim that either you have to have a diminution of economic activity, or you need to have been told by a government agency that you need to shut down. Okay. It's fairly easy for the IRS to turn around and say, okay, show me your numbers. Did you really have a decline in earnings? Or show me the order from the local government that said you had to shut down if you can't produce one of those two. I think that you are likely in the crosshairs and the IRS is coming after, particularly people who may have filed for these claims, in part as a response to the kind of boiler room calls that you mentioned.
The IRS can use a technique called a John Doe summons to essentially go to one of these promoters and say, well, you go to the judge and you say, Judge, give us a summons that requires the promoter to send us a list of everybody they did business with in respect to this. And the judge will say, why should you get that? And the IRS will say, well, we have examined X number that were associated with this promoter and all of them were defective. And the judge will say, uh huh. Okay.
Art Wiederman, CPA: Exactly. I mean, and so I'm reading right here an article from Tax Notes and it says, IRS Training Materials explain how examiners should scrutinize the use of the Employee Retention Tax Credit, which the agency warns is being abused by third parties with schemes targeting employers that are ineligible for it. So in other words, the IRS knows the name. There is actually a form that you can fill out. I don't know the number off the top of my head that if you have been approached by a promoter that you believe is asking you to do something illegal, you can turn them in to the IRS.
And I guarantee you there are CPAs out there whose clients have called and have said, you know, this is really annoying and my client expects me to buy into this because so-and-so said it was good and they said, you can take it on tech talk and, you know, things like that. Right. And so all we're going to say and I don't want to go much further on this, Mel, because we got a lot of other things we want to talk about is that be very careful. If you have any questions about this, please email me at awiederman@EideBailly.com.
I have done supervised reviewed in great detail over 125 dental practices that we've gotten over $5 million for. Our firm has done probably over a thousand of these. I don't I've looked at the list. It just keeps going and going for all types of businesses, in my opinion. There are very few CPA firms that know these rules better than Eide Bailly does. We have a team, our partners, Joe Stoddard, Jim Donovan, Tanya Rule, they're on top of this. I call them with questions. So just be careful, folks, if something doesn't smell right.
All right. Let's go to the next one. We had this thing called the Inflation Reduction Act that got passed. And I heard that they are basically adding $87 billion over the next ten years to the IRS budget and they want them to hire, what is it, 80,000 employees, Mel? So should we all be like I mean, you know, stop writing our dog off as a dependent and stuff like that? What does this all mean?
Mel Schwarz: I would advise not, I would advise you go ahead and stop writing the dog off.
Art Wiederman, CPA: Well, now, wait a minute. My dog helps me in the business. Yeah, come on. You know that, please. Really. There's got to be some advantage to doing taxes and helping the government. 40 years. No just kidding. No, no, no.
Mel Schwarz: They shut that down when they required you to provide his Social Security number. Oh, that is that.
Art Wiederman, CPA: Well, you may have a point there. I'm telling you.
Mel Schwarz: That may be one other actually, that may be something that the IRS should consider spending. Some of this $89 billion that they've gotten are to cross-reference the Social Security numbers and see whether they actually exist. Yeah, it is. I think there has been a number of things that have floated around on the Internet that have talked about sort of the sky is falling as a result, that this is going to be an army of IRS agents that are going to march in and audit every human being that goes way beyond well, for one thing, that's nowhere near enough money to accomplish that. The reality is they're hiring plans and these are hiring plans that were conditioned on getting this additional money are more in the area of 5 to 7000 employees per year, and that's a gross number. That's not a net number.
There are a tremendous number of IRS employees that are eligible for retirement pretty much at full federal retirement pensions. So what the net number is going to look like is going to be nowhere the size of some of the numbers that you hear discussed, all of them, a lot of the money. In fact, over half the money is directed at things such as improving the IRS computers, having somebody answer the phone when you call the IRS and maybe processing the couple of years worth of backlog that they have on returns right now. So it's not a. Yes, there's going to be more activity. I think we should be looking for activity in areas that either are easy to focus on or things that are of particular interest and possibly fairly broad interests. So that is what you state about the Employee Retention Credit, the I.R.S. I think that's very timely. That is one area that I would expect them to send, particularly some of their newer agents out to look at another area that we know that all that IRS is always concerned about are transactions in cryptocurrency. There is a belief in Washington probably. Well, whether it's correct or not, there is a belief in Washington that a significant number of cryptocurrency transactions are trying to hide something. And that is always an area. It creates a sense of suspicion that is can lead. So I would be I mean, I think these are two and I don't want to say that, you know, there is no way to legitimately claim an ERC or there is no way to. And I guess now what we're going to be looking at is people claiming some capital losses with respect to their cryptocurrency.
Art Wiederman, CPA: Oh, my goodness. It was a 32 billion and oh, my gosh, it was incredible. The guy, he actually agreed to an interview. I don't know if you saw that. The CEO, he looks like he's about 12 years old and he talked about how he made mistakes and all this stuff. And this is all on TV, on the Internet. So I'm not giving up. His mother and father are Stanford law professors. It's crazy. And so yeah, I mean, what happens with all that money and all that? I mean, that's again, I don't have a P10 number anymore. So I don't have to worry about it, nor do you.
Mel Schwarz: But it's like investing with that guy in New York City, you know.
Art Wiederman, CPA: And unfortunately, I did have some people who did.
Mel Schwarz: Yeah.
Art Wiederman, CPA: So we shouldn't be really super. I mean, the IRS' computer system is circa 1960. Yes. You've experienced it. I've experienced it. I think the statistic, Mel, was that the IRS answers maybe 11% of phone calls on a timely basis. I mean, it's a ridiculous number. So they really need to improve their customer service.
Mel Schwarz: They desperately need to improve their customer service. They desperately need to improve their ability to process the returns. And the expectation is that money that is that a lot of this $89 billion will ultimately be dedicated to those areas. And that is because I think that's where the need is going to be. We're going to have with the Republicans in charge in the House, we're going to have some fairly close supervision of how this money is spent and hopefully that will move it in the service direction. Not to say that there's not some benefit to additional enforcement because it does seem unfair that you pay your taxes, why don't the other guys pay their taxes? On the other hand, the system is the system needs some help right now.
Art Wiederman, CPA: And they fell behind for two years of COVID. So they were shut and shut down completely for almost a year. That I mean, from what I understand. Yes.
Mel Schwarz: And you can only, remote work only does so far. At some point, you've got to be on site.
Art Wiederman, CPA: All right. Let's save these folks some money. So I know that there's almost a half a, I think it's a half a trillion dollars maybe in new energy incentives in the new rules. And I think for the dentists, number one is the electric cars. So we're not going to get, I mean, if we could spend two days talking about the new electric car rules, but from a high-level kind of talk about if someone is thinking in the next again, this is coming out on the 14th of December. So in the next two weeks or two and a half weeks, your accountant says you need a write-off. Go buy a car. All right. So let's talk about if you want to buy an electric car, how does that all work?
Mel Schwarz: Well, right now there are still some what we would call limitations on the ability to claim, we're going to get a bigger credit. We're moving up to a $7,500 a car credit. Now, there are some limitations here based on what the sale price of the car is. There are some limitations based on how much money that you earn. So if you're over that sort of magic, $400,000 taxable income for a married couple, you're maybe limited in your ability to access these electric car benefits. But it is going to be more and I think more importantly, what they have done is they've taken the limitations to the mark-by-mark limitations. Usually, Toyota could sell so many and Lexus, and you know, GM could sell so many and Ford could sell so many. Those sort of limitations are taken away beginning in 2023.
Now, what substitutes for them is some requirements for domestic content, domestic assembly, which at the moment there's some question as to exactly how they're going to apply, and there is some question as to which cars are going to satisfy. So I hate to say this, but if you are really interested in an electric car, well, certainly waiting until 2023 to make the purchase and even going beyond, you know, maybe even going beyond January and February until we see some settlement.
One of the changes we may see, and I think is being pushed very hard is to loosen up some of the domestic content requirements, at least in the beginning. And that will give us and give more companies an opportunity to advantage these credits in connection with the electric cars. So wait a couple of weeks, at least. On the other hand, we are looking, I mean, if this is a tax play and you don't specifically want to participate in the electric cars or you say, you know, okay, I can, I only keep the car for a couple of years anyway. Or maybe I like to keep a car for a couple of years. I'll get the electric car in 2024 when all this settles.
Now, buying the car this year, I think, begins to make some additional sense, because we do have, we are going to have a change in the depreciation rules beginning next year. We have gotten used to the idea that you can pretty much expense any capital asset that you purchase. There are still going to be opportunities to expense capital assets, including the car that you use in the business. But if you don't fit into that special category, the percentage that you cannot deduct on the front end is going to go from 100% to 80% next year. So there's that and that may apply to some of the other things that you might be considering for putting in your business, perhaps even more than the car.
Art Wiederman, CPA: And we'll get into that one in a second. I want to get back to electric cars. So I'm thinking, Mel, that, you know, if you are looking at a car and one of the things you and I have talked about is that you really have to lean on the dealer, the car dealer. You have to go to the car dealer and say, listen, this is the car that I'm looking at buying from you. Has it hit the and I think in most cases it's 200,000 sold domestically if I remember correctly, I could be mistaken. So I know that many of the Tesla models have hit that because obviously Tesla has become one of the most popular automobiles on the road. I know we talked about maybe some of the Toyota brands.
So if you're looking for a tax write-off for this year and you want to buy an electric car and with an electric car, obviously comes non-tax issues such as charging stations. I mean, we don't have as many charging stations in this country as we have gas stations. So, you know, if you need a car that's going to go five or 600 miles on a charge, most of these cars don't do that. So maybe do I'm not an expert in electric cars. But if in 2022, folks, you want to buy an electric car and it hasn't hit the limit and it qualifies and they don't have all these domestic assembly requirements in them. And I think there's an August 8th date that you have to look at or August 23rd or something like that. And again, we don't have time to get into all of that on a podcast. Is it may be a really good play for you to buy this car in 2022.
On the other hand, if you want that Tesla model that qualifies for the $7500 credit, remember, a credit is much better than a deduction because a deduction if I get a $7500 deduction and I'm in a, let's just say a 30% tax bracket, there isn't a 30%, but just the numbers are easy. That's a $2250 tax savings. But if I get a $7500 credit, I get $7500 in my pocket. And that's much better than a deduction. So, you know, talk to your CPA if you have any questions about that, certainly give me a call I can help you with all of that.
The other thing that came up with all these energy incentives is that you and I talked about and you shared this with me. I think this is great. We have a lot of our doctors who are very charitable people and they spend time on boards of not-for-profit and their local church or synagogue or civic organization. And Mel, I guess there's some new provisions in these laws that help not-for-profits as far as putting up, you know, solar panel roofs. And talk about that.
Mel Schwarz: Exactly so. In many ways, this is the big change that was included on that side of the legislation. As you say, under traditional rules, a tax-exempt charity, a church, synagogue, whatever. They didn't get to play in the incentives that the tax code has for energy efficiency, for alternative energy sources. Beginning January one of 2023, the rules change. And, in fact, with respect to those incentives, the charity, church, synagogue, state government qualifies. And in fact, instead of a credit. Because they don't pay taxes. Right. Instead of a credit on their return, what they effectively get is a check from the IRS in the amount of what the credit would be, and they call it, it's called direct pay.
And certainly for those of you or your listeners that you know are actively involved on boards, are involved in just volunteering this is something that is because it's things that are out there. It's putting up a solar panel. It's creating some efficiencies with regard to the way the electricity is used in the facility. These are items that in a solar panel, the IRS will now pick up. Well, they'll send you a check for 30% of the cost of buying and installing your solar panel so long as you place it in service in 2023 or later. So don't put it in service today.
Art Wiederman, CPA: Yeah, right. But let's wait till next year.
Mel Schwarz: Send the construction guys home. But that is a, that is something that was never available before that suddenly becomes available. And there were ways to do it. But it was somewhat cumbersome. And this is really something that it's going to be a relatively simple form. And it's something that, you know, I think the bookkeeper at the charity could easily manage with a little bit of guidance. So be aware that it's out there. Be aware that you can take advantage of it and that, you know, you too can. And that's a very good way to contribute, I think, to the whole green movement is by bringing entities that probably already have an interest in being green, bringing them to the table, bringing them on, and really showing this additional, I mean, 30% off benefit that the government is now going to offer them.
Art Wiederman, CPA: Exactly. All right. Let's hit a bunch of topics, Mel, regarding the dentists and what they can do in 2022 to save taxes. Let's talk about the tax rates. The tax rates other than being indexed for inflation are not changing between 2022 and 2023 to the best of any of our knowledge right?
Mel Schwarz: Correct.
Art Wiederman, CPA: So we go from a 10% marginal tax rate to a 37%. So folks, let me explain just for a second year or two, you're going to hear, you know, I have dentists who I'm in an 80% tax bracket. No, you're not in an 80% tax bracket. Okay. There's a marginal rate in an effective rate. The marginal rate says that if I make $300,000 a year, I'm in a 24% tax bracket. That means every additional dollar I make, up to about maybe $340,000 a year is going to be taxed at 24%. Then once I hit the end of the 24% bracket, it goes to 32, then it goes to 35. Then once your taxable income is over about $660,000, I believe it is. You are now at the maximum bracket is 37%. So the only change, Mel, is that they indexed because I heard there's inflation out there. Is that true?
Mel Schwarz: Yeah, that's what the economists tell us and the economists told the IRS. And so we're essentially going to take each of those brackets, each of those trigger points, and move them up about 5%. So there is you know, again, it just reflects the change. But we're not talking about any kind of structural change. We're not talking about a change in the top rate applying this year versus 2023.
Art Wiederman, CPA: And the capital gains rates have not changed, nor are they changing. So folks, here's the deal. Remember that an ordinary income item is taxed at anywhere between ten and 37%. But if I can generate a capital gain on something that is taxed at either, well, zero. We'll talk about that in a second. 15 or 20%. Now, you got to in order to get a 20% capital gains rate, I think you've got to have income of over like $600,000. So most of us mortals are going to have capital gains taxed at 15%. There's no cheaper money. So for this year, 2022, the markets are down. The S&P is down by about 17%. The NASDAQ is down by 30%. The Dow is down by about seven or eight, but that's just 30 stocks. So there are doctors, you're going to have losses in your portfolios right now. So maybe this is the year if you want to recognize some of those losses, you only get a capital loss of up to $3,000. If you have net losses, it's 3000. The risk carries over. But what if someone's owned Apple stock from 1872 that they bought at a dollar a share and is now split 17 times is now worth a gazillion dollars? If you've got losses in your portfolio, I can offset them against my gains right?
Mel Schwarz: That's correct. So this might be a year to harvest. We talk about harvesting losses as a way. I've recognized capital gains over the year. How much loss do I have in my portfolio? Can I harvest that and offset the gain so I don't pay any capital gains tax? But this is also an opportunity if you have some highly appreciated stock that you do not think you will hold until you pass away. This is an opportunity to recognize some of that gain, knowing you have losses already incurred or losses that you can incur that will offset that gain and effectively keep that out of the tax system.
Art Wiederman, CPA: That's right. And one other thing that we want to talk about, too, and is jumping a little ahead to when we're going to talk about deductions is if you own appreciated stock. So let's say you bought Apple stock for a dollar a share and now it's worth $100 if you haven't looked at what it is. But let's just say it's worth 100,000 and you paid a thousand for it, which is not too far from the truth if you bought it 10, 15, 20 years ago. So if I sell that Apple stock, I have a $99,000 long-term capital gain and I'm going to pay. And again, in California, the rates are going to be as high as 13.3%, but let's just call it ten. So I'm going to pay 15% federal 10% that's California, that's 25%. So my gain call it 100 grand of a gain. I end up with 75,000 that I can give to a charity. But wouldn't it be better, Mel, if instead of doing that, I just gave the stock in kind? How does that work?
Mel Schwarz: When I give the stock in-kind, I get a deduction, but I don't have to recognize the gain. Right. So I get the deduction for the hundred thousand, not for the 1000 that I pay.
Art Wiederman, CPA: That's right.
Mel Schwarz: So that is you can either pay. You are able to significantly increase the value of your contribution by giving the stock, giving the appreciated asset, rather than cashing it, paying the tax, and then just sending them cash.
Art Wiederman, CPA: And the other thing you can do, there's a thing out there, folks, called donor-advised funds, which is really cool to use. So let's say that you go to your account and you had a big year in your dental practice and you really want to help your you know, you really want to help several organizations. You don't know which ones you want to help the Cancer Society, the Alzheimer's Society. I mean, whatever society you want to help, but you're not really sure over the next couple of years and you want to give $100,000, you can contribute to what's called a donor-advised fund, which is a fund that says, okay, I'm going to give this fund a $100,000. I'm not going to decide where the money's going today, and it's not going to go to the charity today, but it's going to go to the charity sometime in the next couple of years. You get that deduction today and then you can choose to dole that money out over several years right now.
Mel Schwarz: That's correct. Yeah.
Art Wiederman, CPA: So that's one thing that we talked about. All right. Let's get into quickly about retirement plans. There are three types of retirement plans. Baby Bear, Mama Bear, Papa Bear. Folks, the baby boomer plan is the simple IRA. And you can put up to about 35,000 if you put your nonworking spouse or working spouse on the plan. It is too late to set one of those up for 2022 because you have to have had done that by October 1st.
The second type of a plan is a profit-sharing plan where you can put in up to 60, you know, potentially if you're over 50 years old, $67,000. And if you put your nonworking spouse on the plan, that's another potentially $25,000 or $30,000 you could put in. And you'll have to put in ten or 15 maybe for your staff. If you want to set one of those plans up, be my guest. You have to have that done by December 31st and we'll talk about basis in a second. And then if you have a lot of money, 100, 200, 300,000 that you can, you are just going to save it in your personal savings. I would strongly encourage anybody over the age of 35. That's right 35 to take a look at a cash balance defined benefit pension plan. So if you have any questions about any of this, again, give me a call 657.279.3243 or at awiederman@EideBailly.com. I've been doing this for a long, long time.
So the one thing that you have to be really careful about folks, if you want to go to a profit-sharing plan and you already have a simple IRA, you must stop funding your simple IRA. As of December 31st, you can find your last payroll and put the money in the first week of January, but as long as it was for last year, you cannot have a simple IRA in any other type of plan. All right.
Well, you mentioned depreciation is kind of going to get phased back a little bit. So, folks, another thing that you can do is buy dental equipment. Now, I've heard from different dental suppliers that the supply chain issues are still out there, but there's still stuff that you can buy. You can buy digital scanners, you can buy ICATs, you can buy, you know, all these, you know, Serac machines if they're available, they have to be placed in service before December 31st. So if an equipment salesman says to you, oh, hey, Dr. Schwarz, don't worry about it, just give me a deposit and we'll send you the equipment next year and you can write it off this year. Nope. Wrong answer. So, Mel, they're changing the, you get 100% bonus depreciation this year, but that's starting to phase out, isn't it?
Mel Schwarz: Yes, we lose 20%, essentially 20 points every year going forward. So for 2023, it's going to be 80%. For 2024, it's going to be 60% and on down. Right. So that is and there will be an effort to change that. Given the political situation, I don't think we can count on them being successful in restoring the hundred percent depreciation for 2023. So if you can get the property in service, that is key.
Now, keep in mind, what does in-service mean? In-service mean it's got to be in place and available for use. It does not specifically have to be used. So, for instance, if you are taking off the week between Christmas and New Year's, so long as the machine is delivered, the machine is hooked up and is ready to be used on a patient. Then you are in 2022, even if you have no patient until the first week of 2023.
Art Wiederman, CPA: And I would recommend that you take dated pictures of that installation so that the IRS can, you know, again, remember, Mel and I have talked about this many times, not only off the podcast and webinars that we've done together, but on them as well, is that you are not required, folks to pay one dime more of tax than the law allows you. And, you know, we always use the term pigs get fat and hogs get slaughtered. And, you know, I always tell my clients, Mel, you know, there's white, which will do all day. There's black, which we never do. Meaning and I'm talking about the white being an absolute 100% fully deductible, black being 100% totally illegal. And then there's the gray area, which is between white and black. And basically we talk about that.
So, you know, that's kind of how we run the place. And, you know, most of you folks are not CPAs, but you know enough to know the difference between a business and personal expense, we'll save that for the last item before we sign off today.
Let's talk about car purchases. Before I go from there, one thing that I would encourage all of you to do, whether it be for the pension plan set up, especially if you're going to use 2023 profits to fund your 2022 pension. Because remember, folks, if you set up a plan, you do have until the due date of your tax return, including extensions to fund that plan. So let's say you have 100,000 and you can fund the plan for 2022. You don't have to write that check on December 31st. However, you need to have what's called S corporation basis. We are not getting deep in the weeds in that.
If you write anything down from this podcast today, folks, here's what you need to write down. If you are either buying a piece of equipment before the end of December, placing in the service, or you're setting up a pension plan, you must call your CPA or tax advisor and say the following: Dear CPA or Tax Advisor, I am setting up a pension plan. I am buying some equipment. Do I have, if you're an S corporation, do I have sufficient S corporation basis to take the deduction in 2022? If they say what is basis mean, you need to call me. If they say No, you're good. I've looked it up, I've checked your basis, I've calculated it, then you're okay. So that's very important to know.
Mel, automobiles. So there's a difference if I buy a car that's more than 6,000 lbs. versus less than 6,000 lbs. Right?
Mel Schwarz: That's right. It's because it's more than 6,000 lbs., its a truck.
Art Wiederman, CPA: Yeah. Or it's a big you know what truck.
Mel Schwarz: You know what and it effectively is taxed pretty much the same way as a truck.
Art Wiederman, CPA: Right. So, if you buy a vehicle and it is over 6,000 lbs., GVWR ground vehicle weight rating is what that's called. You can find that rating on the inside driver's front door. It will be right there. It's got to be over 6,000 lbs. I had a client that came to me, there's a GVR rating and a GVWR rating and the GVR rating for that car was 6002, but the GVWR was 5988. And I said it didn't qualify. And I won't tell you what the rest of the conversation was because my client wasn't very happy. But that's the law.
So if it's over 6,000 lbs., it's treated just like the purchase of a piece of dental equipment. I get 100% bonus depreciation this year, times the business percentage. Now, folks, pigs get fat, hogs get slaughtered. Nobody uses a car 100% for business. But I will by saying that, get an email from somebody who says, Art, I have a car at the office and I only drive it from the office to all my business meetings. So you're wrong. You don't know what you're talking about. Yeah, I'm sure there's one or two people out there that do that, but most of us don't do that. So driving to and from work and generally doesn't qualify for business driving, but driving to the lab, driving to see the CPA, driving to CE courses, driving to anywhere that's business related is business driving.
So you know, you've got the maximum deduction for 2022 is $19,200 in depreciation which is 11,200 for the depreciation and 8000 for the bonus part. And then that's going to go down each year as you continue to depreciate the car. So if you want a full write-off, the $6,000 car is the way to go. Do you want to own a car that's 6,000 lbs. that gets three miles to the gallon and we're still at five and a half, $6 of gas here in California. I love when they say the average gallon of gas is $3.40. I was in Columbus, Ohio, two weeks ago. I went to the Ohio State Michigan football game. I'll tell you what, if you're an Ohio State fan and you were in that stadium, I've never heard 107,600 people so quiet in my entire life in the second half. It was a fun game to watch, especially if you were a Michigan fan. And I'm not going down that road either because I will get death threats. But when I was in Columbus, I mean, the gas was, you know, three, three and a half bucks a gallon. So it's all different in all parts of the country. So we got automobiles.
And then the last thing we'll talk about, Mel, is children on the payroll. You know, if you have a child, the standard deduction. So they change the standard deduction in 17, didn't they?
Mel Schwarz: Yes, they significantly increase the standard deduction with the idea that they wanted people to be able to take the standard deduction and not have to go through the bookkeeping problems of itemized deductions.
Art Wiederman, CPA: So the way this works, folks, is this in state taxes, meaning your real estate taxes, your state income taxes, for those of you who live in the 41 states that have them DMV fees, other taxes that are deductible, you are limited to $10,000, period. That's not changing anytime soon. So let's say that you have done a good job, you've paid your house off or you've paid it way down. Say you have no mortgage. I get $10,000 for taxes, I get nothing for home mortgage. And the other big thing is charitable contributions. Well, again, when I talk about charitable contributions, folks, it is only in the context of taxes. Giving money to charity is a very, very personal thing that every human being has to decide how much or how little they want to give. But, you know, maybe you only give 5000 a year to charity and say only maybe you give 5000 a year to charity. That's 15,000. You would much rather, Mel, use your standard deduction of 25,950.
So folks, if you're going to be in the standard deduction, you don't want to make another one or $2,000 of charitable donations in 2022. But maybe next year you're going to give 20, 30, $40,000 to your dental school and their endowment fund to build a new dental building, a building for the dental students or something like that. So you want to bunch your charitable donations into a year where you're going to have enough to put you over the standard deduction. Again, that's why all of you should be sitting down with your CPAs and talking to them about, what can I do to save taxes?
I was just on a call, Mel, with one of my best Triple A plus clients, and he's looking at selling a partnership, interest in his partnership to another dentist. And they said, he said, Art, should I do this before the end of the year, after the end of the year? And we looked at where he was this year and their practice bought a ton of equipment this year. So we decided that if he sold it in 2022, okay, he would only be in a 24% marginal rate, whereas if he sold the interest in 2023, he would be and there's recapture tax that was involved. That was the ordinary income part. He was going to be at 32%. So that's what you need to be doing with your CPAs folks. And that's what we at Eide Bailly are really good at. There's lots of smart people in this firm. I found out being part of it for two and a half years.
All right. Last thing I want to touch on and this is your kind of bailiwick so let's talk about what IRS is doing about auditing, audit rates. I mean, you know, everybody just like I almost feel like everybody thinks that nobody's getting audited. So I can run the dog and the bird and the fish and the poodle through the practice. Right. And so, you know and I know that the IRS doesn't want to I mean, the IRS could balance the federal budget by auditing 50% of returns. Number one, they don't have the manpower to do that. Number two, politically, that would be suicide, right.
Mel Schwarz: I think that's correct. Yes.
Art Wiederman, CPA: Right. Right. So but let's talk about the audit rate. We have this $87 billion. How are they doing as far as auditing small businesses? Are they increasing the auditing of small businesses? What's happening in Washington on this?
Mel Schwarz: Yeah, but I think there is there is going we are going to see an increase in the auditing of small businesses. We're going to see an increase in the auditing of small businesses as they look for specific things. We've talked. We keep coming back to IRS. Employee Retention Credit. That is one of the ones that they're going to look at. There does seem to still be a sense that they're trying to honor the $400,000.
So if your income and here the income before deductions, the income is 400,000 or less for a married filing couple. I don't think your percentage chances are likely to go up that much unless you've got a trigger on your return. And, you know, triggers come in lots and lots of different flavors and it connects very closely with your statement of pigs get fat and hogs get slaughtered. So, you know, things that stick out, things that have been associated with misbehavior by others, let's say. You want to be. I mean, they do they risk they're going to raise your risk of examination. How much? We can't say. But it is I think that for the pretty much straightforward filer, there's going to be very little change in the incidence of the exam. We're going to see to the extent that the service because the service knows where the money is and the money is not in an individual small business. The money's over at Microsoft. That's right. That's how you collect if you get a, you're going to try and raise revenue, that's where you go collect it. It's like Willie said about the banks, why do you rob banks? Well, that's where the money is. They are the ones with the money.
Art Wiederman, CPA: Well, he was a smart guy, you know?
Mel Schwarz: So I don't think it's something to be afraid of. I think it is something to be conscious of in the sense that you don't want to make a spectacle out of yourself.
Art Wiederman, CPA: Right. The one thing I want to make and this will be the last point then unfortunately, Mel, we have to call it a podcast, is this, folks, when you run your business, if you choose to be more aggressive in the deductions that you take in your business, the expenses you pay through your business, Costco, Home Depot, I mean, I've never seen that go through. My favorite deduction that I saw go through one of my client's books was a credit card charge to Victoria's Secret, which he called uniform allowance. And I just lost it right there, you know. But, you know, if you're going to be aggressive, you want to go on the deduction side. I will be adamant about this. I have fired three clients in my career over this. You must report every dime of income that you receive. Not negotiable.
I had a doctor who I had a consultant 20 years ago, called me Mel and said, Did you know that this particular doctor is receiving 7 to $9000 a month of cash and not putting it in the bank? And I said, what do you want to do? I said, I want to have a meeting. We had the meeting and I asked the doctor, so is this true? And the consultant was sitting right there and the doctor said, yes, this is true. And I said, Why are you doing this? And the answer was amazing, Art, because if I didn't do it, you'd make me pay taxes on it. I said, okay, thank you very much. I as of right now, I'm terminating my relationship with you as an accountant because remember, folks, you sign your tax return under penalty of perjury. Penalty of perjury they send people to jail for this. So you're not going to go to jail if the IRS disagrees that a particular expense in your business is not a legitimate deduction, you're not going to go to jail if you claim 80% business use and the IRS lands on 65% business use, you will go to jail if you take a bunch of money into your business and you don't report it as taxable income. Am I off base?
Mel Schwarz: You're completely correct.
Art Wiederman, CPA: Right. So that's the one point I want to let Mel Schwarz, director of legislative affairs at Eide Bailly. You are a wealth of knowledge and I am so glad to know you because it really helps me deliver the message to my listeners and to my audiences. Folks, if you have a chance to listen to the podcast that Mel and I did, it's 2 hours, a deeper, deeper dive into tax planning and all of these subjects that we just don't have the time to do. And a podcast that lasts little less than an hour. So feel free to go on to our Eide Bailly YouTube page and look up December 2nd webinar for that and look at our entire Business of Dentistry Webinar series, and our transition series is all on our YouTube page. It's there to be had, and if you want a link to it, we can send it to you.
Mel, hang on. As I take this thing out, as I take the podcast out, thank you so much for your time and expertise today. Appreciate it.
Mel Schwarz: Thank you for having me Art. It's always a pleasure.
Art Wiederman, CPA: And folks, don't forget to go to our website of our wonderful partner, Decisions in Dentistry magazine www.DecisionsinDentistry.com. 140 continuing education classes at a very, very reasonable price and the best clinical articles and information regarding helping you to be a better clinical dentist that you're ever going to find in any publication anywhere. They have a great website. They have a great magazine. www.DecisionsinDentistry.com.
If you are listening to this podcast and you hear all this stuff and you say, Wait a minute, my CPA doesn't help me with any of this. I never meet with them. I always get a call. On April 14th, it says, I owe $75,000 and I don't like that anymore. Give me a call. We can make that not happen to you anymore. We right now are working very hard in the months of October, November and December, meeting after meeting after meeting and calculation after calculation to try and help you to pay as little money as you can. My job is to increase the federal deficit and the federal debt as much as I possibly can by cutting your taxes. Give me a call 657.279.3243 or awiederman@EideBailly.com.
With that folks, that will be it for this edition of The Art of Dental Finance and Management with Art Wiederman, CPA. Again, please tell your friends about the podcast. I think there is an organization that is sending out to dentists about voting for your favorite podcast. I voted for my favorite podcast. I wonder if you can guess which one that was, but please vote for me. There's lots of them out there. I'd love to get some votes that make me feel good. Stroke my ego a little bit, but I don't get anything for it. But that would be nice. And with that said, this is Art Wiederman for the Art of Dental Finance and Management with Art Wiederman, CPA signing off. We'll see you next time.