AUTHOR: The Dental CFO
February 18, 2022
Running a dental practice comes with a multitude of expenses. To provide the best care for your patients, it’s necessary to be well staffed and have sufficient supplies, adequate facilities, and up-to-date equipment. But to be profitable, you must keep a watchful eye on your overhead expenses.
Here’s what you need to know about dental office overhead expenses and how a dental practice CPA can help you determine which expenses are unavoidable and ways you may be able to reduce them.
What Are Dental Overhead Expenses?
For dental practices, overhead, or operating expenses, include fixed and variable costs directly related to operating your business and not directly related to practice revenue.
The average dental practice has both fixed and variable overhead expenses. A fixed expense is one that doesn’t vary with the level of business activity. Examples would include office rent and equipment purchases. Whether you see one patient a day or 20, you’re still required to pay your facility costs and purchase equipment.
Variable costs fluctuate depending on your practice’s activity. Supplies like toothbrushes, toothpaste, floss, paper bibs, etc. will depend on your patient volume. Is your patient load consistent and predictable or do you have more variability? Many patients skipped or postponed non-emergency dental care during the first COVID wave, which likely reduced variable expenses, as well as revenue.
Overhead costs generally fall into the following categories:
- Personnel: wages and salaries paid to dental and back-office staff
- Facility costs: rent, mortgage, utilities, facility maintenance and cleaning, leasehold or building improvements
- Clinical costs: medical supplies, PPE, equipment, dental technology, medical waste disposal
- Business administration: insurance, professional services, payroll, office supplies, business technology, vendor payments, local taxes and licenses, marketing, and outreach
- Discretionary costs: business travel, company car, meals and catering, business gifts, continuing education, and professional society fees
- Owner’s compensation: splitting of the practice profits, taking on additional dentists, how you will pay yourself
These are the most common dental overhead expenses. Even though many of these items are also tax-deductible expenses for dentists, they are still part of overhead and likely can be reduced through smart planning, which can in turn improve cash flow.
Using an Income Statement to Identify Cash Flow
Income statements are prepared separately from your tax returns, and they identify each expense regardless of the impact it has on taxes.
Income statements help break down your practice’s numbers. The essential components include:
- Cost of Services
- Gross Profit
- Income Taxes
- Net Income
Revenue is the total intake for your practice for the period examined on the income statement, such as a month, quarter, or year. For most dental practices, most revenue comes from patients and billing their dental insurance. However, it can also come from practice sharing and merging, licensing products, speaker fees, and other ways you develop your dental practice as a business.
Cost of services for a dental practice would encompass costs specific to generating revenue. This could include certain medical supplies used with each patient and giving out goodie bags of dental care items at each checkup. This cost of services amount is subtracted from revenue to compute the gross profit. All other items not directly tied to rendering services would be allocated to the expense section of the income statement, below gross profit.
Expenses not directly related to revenue generation are reported next, then income taxes, which are accounted for separately. Because taxes will vary based on individual and business circumstances, annual tax law changes, and numerous other factors, income statements often include a line for EBIT, or “earnings before interest and taxes.” Since dental practices also have equipment, and real estate if facilities are owned and not rented, the line is EBITDA, for “earnings before interest, taxes, depreciation, and amortization”.
With expenses, taxes, and other items accounted for, the final line is the net income or loss for the period. Your dental CPA can help compute key ratios with these numbers to determine overall profitability and impact of specific expenses on your practice’s earnings.
Expenses are often summarized on the income statement for brevity and simplicity for an external user, typically a bank, investor, or merger prospect. However, breaking down and categorizing expenses in greater detail can help, for both organizational and tax purposes, to determine where your overhead costs are going.
Take the following example:
- Lab: 7%
- Supplies: 6%
- Payroll: 24%
- Marketing: 5%
- Office, general, and administrative: 11%
- Facility: 10%
These figures would be computed based on the percentage they contribute to your total expenses. It’s reasonable to expect payroll to make up the largest percentage of total expenses. However, a percentage breakdown doesn’t tell the whole story. Perhaps your revenue is lower than you want it to be. You’ll need to look at cutting overhead expenses and/or investing in marketing to drive additional revenue.
These figures also help when comparing to industry benchmarks for similarly sized dental practices in your area. If your breakdown seems vastly off the mark compared to them, it could be a cue to closely examine where your budget is going and how your dental practice is being managed. It’s crucial to work with a dental CPA who is not only familiar with financial accounting for the dental industry but is also well-versed in dental practice management and how those expenses relate to daily operations.
How to Reduce Overhead
While many overhead costs are simply unavoidable, there are ways that dental office overhead can be reduced.
One way is to examine overhead from a revenue standpoint instead of simply cutting costs. Overhead will have less of an impact if your dental practice is generating more revenue by increasing your fees or adding more procedures.
UCR (Usual, Customary, and Reasonable) fees for your practice should be based on what patients are ultimately willing to pay and regional norms for the same dental procedures. It’s recommended to raise your fees twice a year, but not uniformly across all procedures, depending on your location, the types of patients you serve, and other factors. Some procedure fees may need to remain unchanged, and others discounted, based on the patients your practice commonly sees.
Next, expenses need to be examined. Staff is the largest component of overhead for most dental practices, so reducing the number of hours or days your team works can reduce overhead. If your dental practice is going through a slow period or an upheaval such as a major renovation, this may be necessary. However, be sure to think past the immediate slowdown; being understaffed will make it difficult for you to take on more procedures and could cause burnout and discontent with your team.
Supply costs are the next major expense after staffing. Evaluate your annual dental supply expenses and compare multiple vendors to see who charges less for the same products or offers a better volume discount. Consider asking vendors for one-page bids if you want to negotiate a flat margin partnership for all products and equipment.
Writing Off Overhead Expenses
While tax write-offs for dentists are plentiful, some items must be treated differently than simply deducting them from your practice revenue. Deducting some common operating expenses may require you to take additional steps to qualify, and some deductions provide more tax advantages than others.
While the following list of common tax deductions for dentists isn’t exhaustive, these overhead items can have significant impacts on your tax bill.
Salaries and wages
Payroll is typically the largest expense dental practices have, but it also offers the most tax advantages. In addition to deducting the actual wages and payroll taxes paid, plus administrative costs such as payroll services, there are sometimes federal and state-level wage-based tax credits for small businesses. In the pandemic era, employee retention credits have been advantageous, and there are tax credits for small businesses such as dental practices to offset the cost of starting employee benefits programs.
Vehicles and equipment
Until the 2018 tax reforms, major purchases such as vehicles and equipment were typically limited to the immediate deduction of a specified amount. The remaining deductible costs of these fixed assets had to be spread out over multiple tax years. Now, you may be able to claim bonus depreciation or expense equipment in the year of purchase, which can result in a significant tax write-off. However, there are conditions and limitations to this strategy. Be sure to consult with your dental CPA and tax professional regarding the tax treatment of major business-related purchases.
Lab and dental supplies
While seeking out lower prices with vendors can result in opportunities to reduce overhead, you can deduct these expenses regardless of their cost. Supplies and tools used in procedures, occupational clothing and protective gear for yourself and your staff, and additional services such as medical waste disposal are all fully deductible.
Administrative, general, and office expenses
The business of running a dental practice is also an integral part of dental office overhead. The purchase of office supplies, furnishings, computers, technical infrastructure, and incidental expenses such as meals and patient amenities are also fully deductible.
Expert Tax and Financial Management for Dentists
It’s crucial to properly categorize expenses to get the maximum benefits available to you. It’s easy to make numerous mistakes from a business standpoint in running a dental practice, which is why it’s a great idea to engage a finance professional.
The Dental CFO specializes in tax and financial advisory services for dentists at every stage of their careers. Contact us today regarding your dental office overhead expense breakdown and tax reduction strategies.