Fast Tracking to Practice Ownership

Suffocating under a $300,000 student loan, most dental graduates decide to work as associates until the student debt is gone. If you really want to pay off your loan quickly, consider becoming an owner as soon as you can. Use a short-term associateship to hone your clinical and patient communication skills and enjoy the benefits of ownership sooner.

Below is a comparison between a new graduate who becomes a practice owner after two years of associateship and another dentist who works as an associate for seven years and then purchases the practice.

Over a 10-year period the dentist who chose the early ownership option in year 3 has over $800,000 more of excess cash flow than the dentist who did not become an owner until year 8.

Short-term associateships resolve your debts faster, and speed you toward ownership and its many rewards.

Incorporating with Student Debt

There is a general impression, particularly amongst young dentists, that there is no benefit to incorporate as long as they have personal debts. There are significant benefits for a new dentist if they spend less than they earn.

Here’s an illustration that shows how a new dentist can benefit from incorporating his/her practice:

Dr. Young is a new dentist in B.C. whose net income after expenses is $200,000. Dr. Young has $500,000 of personal debt, including a mortgage on her condo and student loans. She needs $3,000 per month for living expenses plus loan payments. If Dr. Young remains unincorporated, she will pay personal taxes of $62,900 on her $200,000 income.

If Dr. Young incorporates her practice she will pay corporate taxes of only $22,000 on her $200,000 income (B.C. tax rate of 11.0%). Her annual living expenses of $36,000 plus $44,000 loan payments total $80,000, which she can draw from the corporation as a dividend. In this model, total taxes will be $31,600 ($22,000 corporate and $9,600 personal). The personal tax on the $98,000 left in the company is deferred until withdrawn.

Incorporation saves the dentist $31,300 in year one!

Keeping the money inside the company and investing nets a much larger return than if the full amount of income was used to repay debt. This assumes the return on your investments inside the corporation would at least equal if not exceed the borrowing costs. Although counterintuitive to some, there is an advantage to paying personal debt off slowly instead of waiting until all debts are paid off before investing.

A Great Tax Shelter-Soon to Disappear

Many dentists are taking advantage of a tax strategy of converting the regular dividends from their corporations into a capital gain generating huge savings.

To illustrate, the capital gains tax on $200,000 of income from the corporation is about $22,500, compared to a tax of $54,400 on dividend income. A tax saving of nearly $32,000! If you double the income to $400,000, the dividend tax is $152,200 while the capital gains tax is $65,100. A saving of over $87,000! As you can see in the table below, the more you take, the more you save.

 

The capital gains method of removing funds allows you to reduce your personal taxes on funds you need for living expenses, make a lump sum payment on your mortgage, or finance the children’s education.

Our fees to set up the capital gains strategy start at $2,500.

It is smart to plan your personal taxes for 2021 now. It is anticipated that an upcoming Federal Budget could either bring about legislative changes or increased capital gains inclusion rates that may end the advantage of the capital gains strategy going forward. Therefore, take advantage before it disappears. Tax saving opportunities that good will not be around for long!