The Devil is in the Details: Properly Categorize Dental Practice Expenses

Your dental office Profit and Loss should be “hyper categorized” to quickly identify and benchmark expenses and determine if they are in line with your expectations for overhead. Let’s assume that “dental supplies” are 6% of revenue on the profit/loss, for example. However, with further scrutiny, this category should not include repairs, office supplies, e-services, small equipment, etc. that could easily be purchased from the same distributor (Henry Schein for example) and lumped into “supplies”.  Managing this properly, one percentage point at a time, is how smart independent dental owners achieve efficient overhead.

            There is another reason to make sure every expense is highly detailed. As you prepare to transition your practice, this detail becomes very important. Every dentist will transition: sell to another independent dentist, sell to a DSO, close the doors, join a group, etc. In preparation for ANY of these scenarios, you will likely obtain a practice valuation. This valuation can vary greatly in its conclusion and appearance from broker to broker, CPA to CPA. All of them, however, will begin with an “adjustment profit and loss”.

            When preparing for a valuation, the expenses in the practice profit and loss will be adjusted by the banker, broker, or accountant to reflect only those expenses necessary to run the daily business and not those expenses that are an “owner benefit”. In other words, it is perfectly acceptable for a business owner to have expenses they incur as an owner that are recognized as a tax deduction: auto expense, phone expense, certain insurance, retirement plans, etc. Many of these expenses are not pertinent to the daily operation, rather they are a benefit to the owner. If you remove the owner and replace them with another that does not elect these benefits, those expenses are “added back” to the net income and increase the value as a result.

            Tax Returns will combine these categories by their nature which is why most banks will require the profit and loss for more detail. Most of the P&L that I’ve reviewed STILL don’t have enough detail:


Insurance:  $8, 600


rather than           


disability insurance:                                 $2,400         

workers comp insurance                        $1,600

business overhead insurance               $   800

health insurance for owner                   $3,800


                                  In this example, the insurance for “health insurance owner” could be adjusted out with the assumption that a new owner would not be required to obtain this as an expense to run the daily business. If the detail is not provided, these add backs are not recognized by the reviewer/preparer.

                                  If you don’t have a dynamite “chart of accounts” and your CPA is not paying attention to the devil in the details, check out a dental CPA as you prepare for your transition as it could make all the difference.

How to Manage Dental Practice Business Receipts?

Welcome to the 21st Century!

What did you do with those receipts from the Super Bowl party? How did you itemize the Sam’s Club run?  Did your staff remember to turn in the party store receipts?  Are you tossing them in a shoebox, so-to-speak, only to give them to your CPA at year end?

Maybe you are scanning them into a document folder . . . Whatever your process, try to calculate the time spent in the life and movement of that receipt. Try to recall the process that pushes that receipt forward and the time and effort that goes into managing that. Double that because your CPA has the same challenges. How many receipts are we managing? Time and effort, ugh.

Modern dental accounting tools allow for software/phone apps that dramatically reduce the time and effort involved in expense management in the dental practice. Now, for that meal receipt, take a picture at the lunch or dinner table with your smartphone and forget about it.  The photograph will be read by artificial intelligence and, over time, will be categorized appropriately with no input from you. The receipt is not only visually recorded but now searchable by all data points:  vendor, locale, amount, date, etc.  if needed later in case of an audit.  In the modern dental office, you absolutely should have a digital-document-management system in place for a couple of key reasons:

1)  eliminate time and effort = improve efficiency. Click the photo and you and your staff can move on to other things. With simultaneous dental CPA access, your accountant can review the coding of these transactions with proper support. The data is accurate, accessible, and processed completely in one step.

2) reduce your risk. By being searchable by all those data points, you can access them at any time for any reason to support an audit or review in your practice. Regardless of whether you are conservative or aggressive on your definition of “meals” with the IRS, you better have the receipts for the meal in question for the auditor. If you don’t have the receipt, the auditor will disallow the transaction, no question. 

This one example of utilizing technology in the dental practice to reduce stress and increase efficiency in process is only one of many options available to the 21st century dental accounting process. Visit Crossroads Tax Advisors to learn more about the benefits of working with a dental accounting firm.