Tax Strategy for Orthodontists: High Margins and Multi-Location Planning

Orthodontics produces the highest operating margins in dentistry, frequently 35% to 45% of collections, on a delegation-heavy model with a small number of doctors and a large number of assistants. That combination creates two tax realities: unusually large profit relative to clinical hours, and unusually favorable retirement plan demographics.

Entity Structure

A single-doctor orthodontic practice belongs in a professional entity taxed as an S corporation. On $900,000 of profit with a $300,000 salary, the $600,000 of distributions avoids the 2.9% Medicare tax plus the 0.9% additional Medicare tax, which is roughly $22,000 per year.

Reasonable Compensation

The argument for treating the residual as return on capital is strong and well documented: the practice owns significant capital equipment, employs a large assistant team executing delegated procedures, carries substantial goodwill and brand value in the market, and often operates locations the doctor is not physically present at on a given day. Document that reasoning contemporaneously with a written compensation analysis. See how the analysis is built.

Retirement Plan Design

Orthodontic staff demographics favor the owner. A practice with fourteen employees whose average age is thirty-one, against a forty-eight-year-old owner, tests very well under cross-testing because the actuarial value of a dollar contributed for a younger employee is lower.

The design is a 401(k) with cross-tested profit sharing, reaching roughly $72,000 in 2026 for the owner, plus a cash balance plan. An owner in her late forties can commonly fund $150,000 to $200,000 into the cash balance plan, and the required staff contribution frequently lands near 5% to 6% of payroll rather than the 7.5% ceiling, precisely because of the age spread. Our cash balance plan guide covers the testing mechanics.

Accountable Plan Reimbursements

A written accountable plan under Treas. Reg. Sec. 1.62-2 covers the reimbursements that matter most in a multi-location practice: mileage between offices, which for a doctor rotating three locations is substantial, the home office used for treatment planning and case review, continuing education and study clubs, licensing, and the business portion of phone and internet.

Travel between two business locations on the same day is deductible business mileage rather than commuting. A doctor covering three offices across a metro area routinely generates $8,000 to $15,000 of reimbursable mileage annually. Our accountable plan guide covers documentation.

The Augusta Rule

Under IRC Sec. 280A(g), the practice may rent the orthodontist's residence for up to fourteen days per year with the rent deductible to the practice and excluded from the doctor's income.

Multi-location practices have a natural use case, since location manager meetings, quarterly business reviews, and annual planning sessions are real recurring events. Support the daily rate with written quotes from comparable local venues, execute a rental agreement, and keep agendas and attendance lists. Fourteen days at $1,800 is $25,200 of deduction against zero income. See our Augusta Rule article.

Cost Segregation Across Multiple Buildings

Orthodontic offices are build-out heavy. Open bay operatories with dedicated air and electrical, sterilization areas, imaging rooms with shielding, extensive cabinetry, decorative and specialty lighting, dedicated HVAC, and often significant site work including parking and landscaping on standalone buildings.

Studies commonly reclassify 30% to 40% of depreciable basis into five, seven, and fifteen-year property, all deductible in year one under the restored 100% bonus depreciation. A practice owning three buildings should study all three, and buildings acquired in prior years can be caught up with Form 3115 in the current year without amending returns. Our Form 3115 guide covers the mechanics, and our medical and dental office study guide covers component detail.

QBI: SSTB Status and the Management Entity Question

Orthodontics is health under IRC Sec. 199A(d)(2), which makes it a specified service trade or business with the 20% deduction phased out at practice owner income levels. OBBBA made Sec. 199A permanent and widened the phase-in range beginning in 2026, which does not reach an owner at $900,000 of income.

A management entity charging arm's length fees for administrative services is not itself a health business, and its income can be qualified business income. However, the regulations contain specific rules limiting this when the entity provides substantially all of its services to a related SSTB, and the fifty percent common ownership test in Treas. Reg. Sec. 1.199A-5(c)(2) generally taints the arrangement. Do not build this expecting a QBI deduction. Build it for liability, succession, and operational reasons, and treat any QBI benefit as unlikely.

The reliable route to QBI for an orthodontist is a genuinely separate non-SSTB business, most commonly real estate rented to unrelated tenants.

Frequently Asked Questions

Why do orthodontists do better with cash balance plans than general dentists?

Staff demographics. Orthodontic practices employ many young assistants relative to one older owner, and cross-testing values contributions actuarially by age. That combination often holds the required staff contribution near 5% to 6% of payroll while the owner funds $150,000 or more.

Can an orthodontist take a salary below total practice profit?

Yes, when the residual genuinely reflects return on capital and business value rather than the doctor's clinical labor. Benchmark salary against associate orthodontist market rates, generally $250,000 to $350,000, and document the reasoning for treating the remainder as a distribution.

Does a management entity give an orthodontist a QBI deduction?

Generally no. Treas. Reg. Sec. 1.199A-5(c)(2) taints an entity providing substantially all of its services to a commonly owned specified service trade or business under a fifty percent ownership test. Build a management entity for liability and succession reasons, not for QBI.

Is mileage between orthodontic offices deductible?

Yes. Travel between two business locations on the same day is business mileage, not commuting. A doctor rotating three offices commonly generates $8,000 to $15,000 per year of reimbursable mileage, paid tax-free through a written accountable plan.

Can I run cost segregation on a building I bought five years ago?

Yes. Form 3115 allows an automatic accounting method change that captures all missed depreciation as a single catch-up deduction in the current year under Sec. 481(a), with no need to amend prior returns.

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