Dentists are among the top-earning professionals in the United States, and the IRS knows it. The combination of high personal income, practice ownership, expensive equipment, and significant payroll creates a tax profile that — without deliberate planning — results in some of the highest effective tax rates of any small business owner in California. This is why tax planning for dentists is especially critical.
The frustrating part is that much of what dentists overpay is avoidable. Not through aggressive shelters or questionable deductions, but through the fundamentals:
- The right entity structure
- A retirement plan that does real work
- Equipment depreciation timed correctly
- Compensation arrangements that don’t leave money on the table
It’s strategies like these that a qualified dental practice CPA executes every year for dental practices that take tax planning seriously.
The practices that pay the most in taxes aren’t always the most profitable ones. They’re often the ones where the entity was set up once, the retirement plan was never revisited, and tax planning happens only in the months leading up to April rather than throughout the year. In this post, we explain what proactive dental tax planning actually looks like and the specific levers that move the needle most for California dentists specifically.
Entity Structure: The Decision That Affects Every Year’s Tax Bill
How a dental practice is structured legally — sole proprietorship, professional corporation (PC), S corporation, or partnership — determines how income is taxed before any other strategy applies. For most producing dentists in California, the professional corporation taxed as an S corporation is the structure that minimizes combined self-employment, state, and federal income tax most effectively at income levels above roughly $150,000 in net profit.
The reason comes down to self-employment tax. A sole proprietor or single-member LLC taxed as a disregarded entity pays 15.3% self-employment tax on all net profit up to the Social Security wage base (and 2.9% on everything above it). An S corporation owner who takes a reasonable salary pays FICA only on that salary — not on additional distributions from the practice. At a net profit of $350,000, the difference in self-employment tax alone between a sole proprietor and a properly structured S corporation can exceed $20,000 annually.
The caveat is California. The state imposes an annual franchise tax on professional corporations and an additional 1.5% tax on S corporation net income — costs that don’t exist at the federal level. A dental CPA who understands both the federal and California-specific picture can model the actual after-tax outcome for your practice’s income level before recommending a structure change.
Entity structure should be revisited whenever a practice’s net profit changes significantly — typically at growth milestones around $150K, $250K, and $500K in annual profit. What made sense in year one of practice ownership may cost tens of thousands in unnecessary tax by year five.
Retirement Plans: The Most Underused Tax Strategy for High-Income Dentists
A well-designed retirement plan is the single most powerful tax deferral tool available to a dental practice owner. The reason is straightforward: every dollar contributed to a qualified retirement plan reduces taxable income dollar-for-dollar in the year of contribution. For a dentist in the 37% federal bracket plus California’s top rate, a maximum contribution can reduce the current year’s tax bill by more than 50 cents on every dollar contributed.
Solo 401(k) for Single-Provider Practices
A dentist practicing without employees (other than a spouse) can establish a Solo 401(k) and contribute as both employee and employer. For 2024, the combined contribution limit is $69,000 ($76,500 with catch-up for those 50 and older). This is a straightforward, high-limit option for associates who own their own entity or newly established solo practices.
Defined Benefit and Cash Balance Plans for Established Practices
For a high-earning dentist over 45 who wants to accelerate retirement savings and maximize deductions, a defined benefit or cash balance plan can allow annual contributions well beyond what a 401(k) permits — in some cases exceeding $200,000 per year, depending on age and income. These plans require actuarial calculations and ongoing administration, but the tax reduction per dollar contributed is unmatched by any other qualified plan structure.
The tradeoff is that if the practice has employees, contributions must also be made on their behalf at defined rates. A dental practice CPA and a retirement plan specialist working together can model whether the tax savings on the owner’s contributions outweigh the cost of employee contributions — a calculation that changes significantly based on staff size and turnover.
SEP-IRA: The Simple Option That Often Leaves Money Behind
Many dentists default to a SEP-IRA because it’s easy to open and administer. The contribution limit — 25% of compensation up to $69,000 for 2024 — is the same ceiling as the employer portion of a Solo 401(k). But a SEP-IRA doesn’t allow the additional employee elective deferral that a 401(k) does, and it contributes the same percentage to every eligible employee, which can make it expensive in larger practices. For most established practices with meaningful income, a 401(k) or defined benefit plan structure will outperform a SEP-IRA on net tax reduction.
Section 179 and Bonus Depreciation: Timing Equipment Purchases Strategically
Dental practices are equipment-intensive businesses. A CBCT scanner, intraoral camera, CAD/CAM milling unit, or chair upgrade represents a significant capital outlay — and a significant tax opportunity if timed correctly. Section 179 of the Internal Revenue Code allows a business to deduct the full cost of qualifying equipment in the year it is placed in service, rather than depreciating it over five to seven years.
For 2024, the Section 179 deduction limit is $1,220,000, with a phase-out beginning at $3,050,000 in total equipment purchases — thresholds that apply to most dental practices. Bonus depreciation, which allows an additional first-year deduction on qualifying property, was phased down to 60% for assets placed in service in 2024 under the Tax Cuts and Jobs Act schedule.
The strategic question isn’t whether to take accelerated depreciation — it almost always makes sense — but when to place equipment in service. A piece of equipment installed in December generates the same year-one deduction as one installed in January, but its timing relative to the practice’s income for the year determines how much tax it actually offsets. Planning equipment purchases with year-end income projections in hand is how practices maximize the benefit.
Compensation Planning for Practice Owners and Associates
How a dental practice owner pays themselves has significant tax consequences that most practitioners don’t optimize. In a professional corporation taxed as an S corporation, the owner’s W-2 salary must be reasonable — meaning it should reflect what the market would pay for the same services — but it doesn’t need to be equal to total practice income. The spread between salary and total distributions is where the self-employment tax savings occur.
The IRS scrutinizes S corporation owner compensation closely. Paying an unreasonably low salary to maximize distributions is a recognized audit trigger — the agency has published guidance and won cases establishing that owners must receive compensation commensurate with the services they perform. A dental CPA familiar with compensation benchmarks for California dentists can establish a defensible salary level that captures the S corporation tax benefit without creating unnecessary audit exposure. The IRS Small Business and Self-Employed Tax Center provides useful context on this topic.
For group practices with associate dentists, the structure of associate compensation — W-2 versus 1099 independent contractor — carries both tax and legal implications. California’s AB 5 significantly restricts the use of independent contractor classification for workers performing services within a business’s usual course. A practice that misclassifies associates as contractors faces payroll tax liability, penalties, and potential Labor Code exposure.
California-Specific Tax Considerations for Dental Practices
California is among the highest-tax states in the country for business owners, and dental practices carry a specific burden that practices in other states don’t face. The state’s top individual income tax rate of 13.3% applies to income above $1 million, and the 9.3% bracket starts at $68,350 for single filers — a threshold many associate dentists clear in their first year of practice.
California also does not conform to federal bonus depreciation. While a practice may take full first-year bonus depreciation on its federal return, California requires the asset to be depreciated over its standard life on the state return: Creating a California-specific addition to income that many dentists and their general accountants miss. The California Franchise Tax Board’s depreciation conformity rules are a recurring source of unexpected state tax bills for practices that rely on federal tax software without California-specific review.
The combination of federal and California tax planning requires a CPA who understands both systems simultaneously — not just someone who prepares the federal return and plugs numbers into the state form. For California dental practices generating above $300,000 in net income, the state-specific planning opportunities and pitfalls are significant enough that they justify a dedicated dental accounting services relationship rather than a generalist tax preparer.
Frequently Asked Questions
What is the best business entity for a dental practice in California?
For most California dentists with net profit above $150,000, a professional corporation (PC) taxed as an S corporation provides the best combination of self-employment tax savings and flexibility. However, the optimal structure depends on the practice’s income level, number of owners, staffing, and long-term goals. A dental practice CPA should model the actual after-tax outcome before any entity change is made.
How much can a dentist contribute to a retirement plan in 2024?
A dentist with a Solo 401(k) can contribute up to $69,000 in 2024 ($76,500 with catch-up for those 50+). With a defined benefit or cash balance plan layered on top, contributions can exceed $200,000 annually depending on age and income. The right plan design depends on the practice’s employee count and the owner’s income level. The IRS retirement plan contribution limits page is updated annually.
Does California conform to federal bonus depreciation?
No. California does not conform to federal bonus depreciation. Assets that receive a full first-year federal deduction under bonus depreciation must still be depreciated over their standard recovery period on the California return. This creates a California addition to income that can produce a significant unexpected state tax bill for practices that don’t plan for it.
What’s the risk of classifying associate dentists as independent contractors in California?
California’s AB 5 (Assembly Bill 5) established a strict three-part ABC test for independent contractor classification. Associates who work primarily within the practice’s usual course of business are generally difficult to classify as independent contractors under this standard. Misclassification exposes the practice to unpaid payroll taxes, penalties, and California Labor Code liability.
Most Dental Practices Are Overpaying — and the Fix Starts With a Conversation
Every strategy in this post — entity restructuring, retirement plan optimization, accelerated depreciation, compensation planning, California conformity issues — is something a dental practice CPA should be evaluating on your behalf every year. If your current accountant isn’t bringing these topics to you proactively, the planning isn’t happening.
If your practice is dealing with any of the following, it’s worth reaching out:
- Still operating as a sole proprietor or single-member LLC with net profit above $150,000
- Retirement plan hasn’t been reviewed or upgraded in more than two years
- No year-end tax projection before December — tax bills come as a surprise
- Equipment purchases made without input on timing or depreciation strategy
- Associate dentists classified as 1099 contractors in California
- California state tax bills that don’t match what you expected based on your federal return
- A general accountant who handles dental returns alongside dozens of other industries
- Planning to buy, expand, or sell a practice in the next 1–3 years
MBS Accountancy works with dental practices and healthcare professionals throughout California to build tax strategies that actually reduce what you owe — not just document what you paid. We understand the entity structures, retirement plan options, and California-specific issues that affect dental practice owners at every stage of their career.
We offer a free 20-minute call with no pitch: Just a direct conversation about your practice’s tax situation and whether we’re the right fit. Schedule yours at mbs.cpa or call our office directly.