A Dental Practice Recovers $83K With Entity Restructuring and a PTET Election
How a dental practice operating across 3 entities in Michigan consolidated its structure and elected pass-through entity tax treatment, recovering approximately $83,000 per year.
Client Profile
| Business | A dental practice |
|---|---|
| Annual profit | $1,970,000 |
| Entities before | 3 separate entities |
| State | Michigan |
| State tax paid at entity level | $83,500 |
| PTET federal benefit | $31,000 |
| Total annual savings | $83,000 |
The Situation
The client operated a dental practice in Michigan through 3 separate entities that had accumulated over time without a coherent plan, generating $1,970,000 of combined annual profit. State income tax of roughly $83,500 was being paid personally on the owner's return.
The Challenge
Two problems compounded each other. The $83,500 of state tax was a personal itemized deduction subject to the state and local tax cap, so most of it produced no federal benefit at all. Separately, the 3-entity structure was generating duplicate filing fees, inconsistent intercompany treatment, and payroll spread across multiple registrations without a defensible allocation.
What We Did
1. Elected pass-through entity tax treatment
Michigan permits a pass-through entity to elect to pay state income tax at the entity level. The entity-level tax is an ordinary and necessary business expense deductible in computing federal taxable income, and it is not subject to the individual state and local tax cap. The owner then receives a credit or exclusion on the state return. This converted $83,500 of largely non-deductible personal state tax into a fully deductible business expense.
2. Consolidated the operating entities
We collapsed the 3 entities into a single operating company with a holding structure above it, eliminating duplicate registered agent fees, franchise taxes, and return preparation costs, and removing the inconsistent intercompany charges that had built up between them.
3. Separated real estate and equipment from operations
Real estate and titled equipment were moved into dedicated entities leasing to the operating company at arm's length rates. This isolates liability, creates a clean basis for depreciation planning, and produces rent that is taxed once without payroll tax. We addressed the self-rental rules of Reg. 1.469-2(f)(6) with a grouping election under Reg. 1.469-4 so that losses would not be stranded.
4. Rebuilt payroll and intercompany agreements
Compensation was consolidated onto a single payroll with a documented allocation across functions, and written intercompany service and lease agreements were adopted so that every charge between entities has a stated basis.
The Result
The PTET election alone recovered approximately $31,000 of federal tax annually by converting capped personal state tax into a deductible entity expense. Restructuring and the associated compliance and allocation improvements added roughly $52,000, for a combined annual benefit of about $83,000.
Key Takeaways
- The PTET election sidesteps the state and local tax cap by moving the tax to the entity level.
- Consolidating 3 entities removed duplicate filings and inconsistent intercompany charges.
- Separating real estate from operations required a grouping election to avoid the self-rental trap.
- Every intercompany charge now has a written agreement and a stated basis.
Frequently Asked Questions
What is a pass-through entity tax election?
It allows a partnership or S corporation to pay state income tax at the entity level rather than passing it to owners. The entity-level tax is deductible in computing federal income, and it is not subject to the individual state and local tax cap, so it restores a federal deduction that would otherwise be lost.
Does every state offer this?
No. A majority of states with an income tax have enacted a version, including Michigan, but the mechanics, election deadlines, and credit calculations differ significantly. The election is generally annual and must be made on time.
Why separate real estate into its own entity?
It isolates liability, creates a clean depreciation and cost segregation platform, and produces rent taxed once without payroll tax. The tradeoff is the self-rental rule, which recharacterizes net rental income as non-passive while leaving losses passive, and that is resolved with a grouping election.
Is consolidating entities always the right move?
No. Separate entities are appropriate where they isolate genuinely different risks, hold different asset classes, or have different ownership. What does not work is entities that accumulated without a plan and carry duplicate cost with no corresponding benefit.
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