Is an S corp worth it for a dental practice?
Often, once the practice earns meaningfully more than the dentist's own clinical work is worth. An S-corporation election does not change what the practice does; it changes how the owner's income is taxed. A sole proprietor or single-member LLC owner pays self-employment tax on the net profit of the practice reduced by the deduction in Section 1402(a)(12) equal to one-half of the combined Social Security and Medicare rates applied to it (Section 1402(a)), with the Social Security portion stopping at the contribution and benefit base for the year, reduced by any wages paid to the owner in the year (Section 1402(b)(1)). In an S-corporation, only the dentist's wages carry Social Security and Medicare tax, and the profit above a reasonable salary passes through on a Schedule K-1 without them. The saving is the employment tax on the profit that is attributable to something other than the owner's own labor: hygienists and associates producing under the owner's supervision, and the equipment and facility. A solo dentist who personally produces nearly all of the collections has less room, because the IRS's guidance on S-corporation compensation treats gross receipts generated by the shareholder's services as pointing toward wages, and only receipts generated by non-shareholder employees or by capital and equipment support non-wage distributions. The same holds for a referral-based specialist, such as an endodontist, periodontist, or oral surgeon, when the specialist's own procedures produce nearly all of the practice's collections. Against the saving run the costs: payroll, a separate Form 1120-S, higher preparation fees, and a salary figure the practice must be able to defend. Dentistry is also a specified service trade or business under Section 199A, so the election does not preserve the qualified business income deduction once the owner's taxable income passes the phase-out range. The election is federal and a professional corporation or PLLC can generally make it, subject to the shareholder limits in Section 1361 and to state law, which generally restricts ownership of a professional entity to licensed members of the profession.
How much should a dentist pay themselves as an S corp salary?
Enough to be reasonable compensation for the clinical and management services the dentist actually performs, paid before any non-wage distributions are taken. There is no formula and no percentage in the Internal Revenue Code or the regulations; the regulation's test is whether the amount is reasonable and is in fact a payment purely for services, measured by what would ordinarily be paid for like services by like enterprises under like circumstances (Treasury Regulation 1.162-7(a) and (b)(3)), and the IRS applies factors drawn from case law, including training and experience, duties and responsibilities, time and effort devoted to the business, what comparable businesses pay for similar services, and what the corporation pays non-owner employees. A practical starting point for a dentist is the market: what an associate dentist would be paid to produce the same clinical days, plus a market rate for the hours spent running the practice, because a producing owner who also manages is doing two jobs. The IRS's guidance directs the analysis to the source of the practice's gross receipts. Collections the owner personally produces point toward wages; collections produced by associates and hygienists, and the return on the equipment and facility, can support non-wage distributions. Two boundaries hold in every case: reasonable compensation must be paid before non-wage distributions, and the IRS's position is that it never exceeds the amount the shareholder actually received from the corporation, directly or indirectly. A written, dated analysis prepared when the salary is set is what supports the figure in an examination.
Does a dental practice qualify for the QBI deduction?
Yes at or below the income threshold, partially through the phase-out range, and not at all above it. Dentistry is a specified service trade or business (SSTB): the regulations under Section 199A define the field of health to include dentists performing services in that capacity (Treasury Regulation 1.199A-5(b)(2)(ii)). For an SSTB, the 20% qualified business income deduction is not restricted by the SSTB rule when the owner's taxable income does not exceed the threshold amount, is reduced across a phase-out range above it, and is eliminated once taxable income exceeds the top of that range, regardless of how much W-2 wage the practice pays or how much equipment it owns. The threshold amount is indexed for inflation and should be confirmed for the specific year against the Form 8995-A instructions. Two consequences follow for dental owners. First, the test runs on the owner's taxable income from all sources, not on the practice's profit, so retirement plan contributions, depreciation, and a spouse's income on a joint return all move it, while for a sole owner the S-corporation salary mostly shifts income from the Schedule K-1 to the Form W-2 rather than changing the total. Second, owning the building through a separate entity that rents to the practice does not sidestep the rule: where there is 50% or more common ownership, the portion of the rental business that provides property to the SSTB is itself treated as an SSTB (Treasury Regulation 1.199A-5(c)(2)).
Does Section 179 apply to dental equipment?
Yes. Dental chairs and delivery units, digital and cone-beam imaging, intraoral scanners and milling units, sterilizers, compressors, vacuum systems, lasers, and practice computers are tangible property depreciated under Section 168 and are section 179 property (Section 179(d)(1)). A practice may elect to deduct the cost in the year the equipment is placed in service instead of depreciating it, subject to three limits in Section 179(b): an annual dollar cap, a dollar-for-dollar reduction of that cap once the total section 179 property placed in service in the year exceeds a spending threshold, and a ceiling equal to the taxable income from the active conduct of the taxpayer's trades or businesses, with any excess carried forward. Both dollar amounts were reset by Public Law 119-21 for tax years beginning after December 31, 2024 and are indexed for inflation after that, so confirm the figure for the specific year in IRS Publication 946 rather than relying on a quoted number. For an S-corporation the limits apply at both the corporation and the shareholder level (Section 179(d)(8)). Used equipment qualifies when it is acquired by purchase from an unrelated party (Section 179(d)(2)). The election is measured by when the equipment is placed in service, meaning ready and available for its specific use, not when it is ordered or paid for, so a chair delivered in December and installed in January is a next-year deduction. Property that stops being used predominantly in the business is subject to recapture of the benefit (Section 179(d)(10)).
Does bonus depreciation apply to dental equipment and a practice buildout?
Yes to both, under two different definitions. Bonus depreciation under Section 168(k) allows a first-year deduction equal to 100 percent of the adjusted basis of qualified property acquired after January 19, 2025, following Public Law 119-21; property acquired under a written binding contract entered into on or before that date is treated as acquired before it and falls under the prior phase-down percentage. Qualified property is depreciable property with a recovery period of 20 years or less, which covers dental equipment and furniture and also qualified improvement property, which the statute assigns a 15-year recovery period, plus computer software. Qualified improvement property is any improvement a taxpayer makes to the interior of a nonresidential building after the building was first placed in service, excluding enlargements, elevators and escalators, and the internal structural framework (Section 168(e)(6)). That reaches much of a dental buildout of leased or owned space in a building that was already in service: operatory plumbing and electrical, cabinetry, partition walls, ceilings, and finishes. Bonus depreciation applies automatically unless the practice elects out for a class of property for the year (Section 168(k)(7)), has no dollar cap or taxable-income ceiling, and can create a loss, which is why it is the default for large purchases while Section 179 is the tool for targeting a specific income figure. Used equipment qualifies if the practice had not used it before and acquired it by purchase from an unrelated party (Section 168(k)(2)(E)(i)). Where both apply, Section 179 is taken first, then bonus depreciation, then regular depreciation on the remainder.
What can be deducted when buying a dental practice?
In an asset purchase, the portions of the price allocated to equipment, furniture, supplies, improvements or a building, and the practice's intangibles, but on very different schedules set by how the price is allocated; the portions allocated to land, receivables, cash, or deposits are not depreciated or amortized. Section 1060 requires the buyer and seller of a group of assets that makes up a trade or business to allocate the consideration under the residual method and report it on Form 8594, attached to both parties' returns; a written allocation agreed in the purchase documents binds both parties unless the IRS determines it is not appropriate. Dental equipment and furniture fall in Class V and are depreciable, so they can qualify for Section 179 expensing and for bonus depreciation as used property acquired from an unrelated seller; supplies on hand also fall in Class V but are deducted as they are used rather than depreciated. Patient records and the patient list, the covenant not to compete, the trade name, and the workforce in place are section 197 intangibles, as are goodwill and going concern value; all of them are amortized ratably over the 15-year period beginning with the month of acquisition (Section 197(a)), with no faster method available. The buyer benefits from value in the equipment class, while the seller reports depreciation recapture on equipment as ordinary income under Section 1245 and capital gain on goodwill the seller built rather than bought, which is why the allocation is negotiated rather than assumed. A stock purchase of the seller's corporation is different: the buyer takes the corporation with its existing basis and depreciation schedules, and the election under Section 338 that treats a stock sale as an asset sale is available only to a purchasing corporation in a qualified stock purchase. Where the buyer is not a corporation and the target is an S-corporation, a Section 336(e) election can produce the same deemed asset sale: all of the S-corporation's shareholders, including any who sell no stock, and the target corporation agree in writing on or before the due date, including extensions, of the target's return for the taxable year that includes the sale date, and the target attaches the election statement to that return, timely filed (Treasury Regulation 1.336-2(h)(3)); that return is the target's final return for a year ending at the close of the sale date, because the S election runs only through that date and the corporation is then treated as a new corporation for income tax purposes (Treasury Regulation 1.336-2(b)(1) and (f); Treasury Regulation 1.338-10(a)(1)). The election is available only for a disposition, within a 12-month period and to a person not related to the sellers, of stock carrying at least 80 percent of both the total voting power and the total value of the corporation's stock (Section 1504(a)(2); Treasury Regulation 1.336-1(b)(5) and (6)), and once made it is irrevocable (Treasury Regulation 1.336-2(a)). The selling shareholders are treated as not having sold their stock, and every shareholder, selling or not, takes a pro rata share of the deemed sale's tax consequences into account under Section 1366 (Treasury Regulation 1.336-2(b)(1)(i) and (iii)), which is why the election is negotiated with the price rather than assumed; the old and the new corporation report the deemed sale on Form 8883 (Treasury Regulation 1.336-2(h)(7)); and because the S election ends with the deemed liquidation, the corporation the buyer now owns must elect anew under Section 1362(a) on Form 2553 if it is to be an S-corporation (Treasury Regulation 1.336-2(b)(1)(ii) and (iii)).
How does an orthodontist report income from a treatment contract that patients pay over the course of treatment?
It depends on the practice's method of accounting, and for an accrual-method practice on whether a payment is received before the work it pays for. An orthodontic contract fixes one fee for a course of treatment that can run across tax years, paid as a down payment plus installments or in full at the start. A cash-method practice includes each payment in gross income in the year it is actually or constructively received (Treasury Regulation 1.446-1(c)(1)(i)), so a fee prepaid in full in December is that year's income even though most of the treatment falls in the next year, and installments are income as they are collected. A sole proprietorship, an S-corporation, and a partnership without a C-corporation partner are not barred from the cash method by Section 448 unless the entity is a tax shelter as Section 448(d)(3) defines it; a C-corporation may use it only if it is a qualified personal service corporation, meaning substantially all of its activities are the performance of services in the field of health and substantially all of its stock is held by the employees performing those services, retired employees who performed them, the estates of either, or a person who acquired the stock because of the death of either, for two years after that death, or if it meets the gross receipts test of Section 448(c). For this purpose a practice taxed as a partnership or S-corporation is a syndicate, and so a tax shelter, in any year in which more than 35 percent of its losses are allocated to limited partners or to owners who do not actively participate in its management (Section 461(i)(3)(B) and (k)(4); Treasury Regulation 1.448-2(b)(2)(iii), which applies Section 1256(e)(3)(C) to decide which interests count), so a loss year in a practice with a non-participating owner can bar the cash method for that year. An accrual-method practice includes a payment when all the events have occurred that fix the right to receive it and the amount can be determined with reasonable accuracy (Treasury Regulation 1.451-1(a)); a payment received for services to be performed in a later year is an advance payment (Treasury Regulation 1.451-8(a)(1)), and for this purpose a payment is received when it is actually or constructively received or when it is due and payable (Treasury Regulation 1.451-8(a)(14)); the practice must include an advance payment in income no later than the year it is received unless it elects the deferral method, under which the portion earned in the year of receipt is included in that year and the remainder in the following year (Section 451(c); Treasury Regulation 1.451-8(d)). Where the practice cannot determine the earned portion item by item, the regulation permits a statistical basis if adequate data exist, or a straight-line allocation over the term of a fixed-term agreement when the payment is reasonably expected to be earned ratably. Outside the short taxable year rule in Treasury Regulation 1.451-8(c)(6) and (d)(6), which applies only when the following taxable year is 92 days or less, no method defers an advance payment for services beyond the year after receipt, and the deferral method is a method of accounting, elected on the return by a practice adopting a method for these payments and, for a practice already on another method, including a cash-method practice moving to the accrual method, changed only with the consent of the Commissioner under the method-change procedures, generally by an application on Form 3115 (Treasury Regulation 1.451-8(g); Treasury Regulation 1.446-1(e)(2)(i) and (e)(3)(i)).
What happens to patient contracts in progress when an orthodontic practice is sold?
In an asset sale, they separate into three pieces at closing, and each piece has its own tax result. First, the balances patients still owe for treatment already performed are receivables: a cash-method seller who keeps them reports the collections as ordinary income, and a cash-method seller who transfers them to the buyer reports the amount allocated to them as ordinary income, because receivables for services are not capital assets (Section 1221(a)(4)); on Form 8594 they are Class III assets, and the buyer's basis in them is the amount allocated (Section 1060 and the Form 8594 instructions). Contract balances not yet collected for treatment the buyer will perform are not the seller's receivables, because Section 1221(a)(4) reaches receivables for services rendered and that work has not been rendered; they pass to the buyer with the contract, a cash-method buyer includes them in income as it collects them, and any value they carry for the buyer beyond the cost of completing the work belongs to the third piece below, not to receivables. Second, treatment still to be performed on contracts the seller has already collected on, in whole or in part, is an obligation the buyer takes over; a cash-method seller has already reported those collections, so the parties agree on an amount for the remaining work, and whether that amount is a reduction of the price allocated under Section 1060 or a separate payment from seller to buyer is set in the purchase agreement rather than left for the returns to characterize. A written allocation binds the buyer and the seller to each other but not the IRS, which can substitute its own if it finds the agreed allocation not appropriate (Section 1060(a)). An accrual-method seller that deferred advance payments under Section 451(c) includes every deferred amount in income in the year the sale ends its obligation to perform, because the acceleration rule applies when the obligation is satisfied or otherwise ends, and a sale of the practice's assets is not one of the exceptions (Treasury Regulation 1.451-8(c)(4) and (d)(5)). Third, the value of the active contracts as continuing patient relationships that the buyer will complete is goodwill or a customer-based intangible, which the buyer amortizes over 15 years as a Section 197 intangible (Section 197(d)(1)(C)(iv) and (d)(2)) and which is capital gain to a seller who built it rather than bought it. A schedule of every active contract at closing, showing the fee, the amount collected, and the treatment remaining, is the document the allocation, the assumed-obligation amount, and the Form 8594 all rest on.
General educational information about United States federal tax rules, current as of the review date above. Tax law changes and every situation turns on its own facts. This is not tax, legal, or financial advice and does not create a client relationship. Inflation-adjusted figures should be confirmed for the year in question before relying on them.
