What is Your Biggest Expense?

Chances are pretty good that if you are reading this you are a dentist, or at least in someway related or connected to a dentist.  That being the case, in response to the title of this blog, you may be thinking that your biggest expense is your rent or maybe your dental supplies, certainly it could be your staff costs or perhaps the cost of your associates if you have any.  If you guessed any of the previous, you would be wrong.  With almost no exception, every dentist has the same “biggest” expense and that expense is income tax.  Some of you may have gotten the right answer immediately but I will guess that most of you did not.  Here’s why.

You have been conditioned, we all have been conditioned to think of our various tax paying components as separate entities.  You have a Dentistry Professional Corporation (“DPC”) and maybe a Hygiene Company or a Real Estate company, and they all pay tax.  Then there is you and your family all of whom are subject to income tax.  We commonly arrange our affairs so that we reduce tax over here by paying more tax over there.  If we juggle it just right, we may move some income into the next tax year in order to defer some tax for a year.  In most cases, even when we use an accountant, we see our tax landscape as a collection of separate tax paying business’s and company’s.  We see ourselves as the owners of a variety of different enterprises, or the participants in a number of different business or investment scenarios, all of which have their own tax consequences.  Alternatively, what we need to visualize is “You Inc.”

         

Perhaps the best way to understand this is to use a dental analogy.  Being the owners of a collection of different taxable entities is like a dentist who sees only the teeth and not the mouth or the smile.  I would hazard a guess that not many aesthetic full mouth restorations can be successfully executed by focussing only on one tooth at a time.  A full mouth restoration requires an overall “view” of the mouth or the smile.  This approach to dentistry has not always been the norm.  Once upon a time dentists were only concerned with single teeth, there was no such thing as any kind of full mouth restoration.  In fact, it took some thinking outside of the box to come to terms with the “full mouth” approach.  It required dentists to think differently about the services they were providing and the methodology by which they were providing their services.  In actuality, some dentists have never made the shift.  In much the same way, it is time for all of us to change the way we look at our biggest expense.

The shift in the dental treatment approach was certainly facilitated by new technology – the ability to approach a problem in a new way by using new methods.  The same holds true for how we deal with “You Inc.” income tax.  We need to consider new strategies that are motivated and driven by a singular focus on “You Inc”.  This new approach is going to be driven by two fundamental changes.  First will be a change in perspective; Rather than focusing on each part of our overall tax landscape the perspective will change to a focus on the whole – “You Inc.”  The second shift in attack will be the development of new strategies, approaches and instruments that will be more aligned with addressing the whole – “You Inc.”

There are accountants and tax lawyers today that do have a more singular approach, however, they are few and far between, and for the most part are not part of the mainstream tax community.  In a future Blog we will explore some of the new tax strategy thinking, some of the singular strategies and some of the new instruments that are available to support a reframing of our relationship with income taxes.  For now, just be aware that your biggest expense by far is income tax.