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Choosing the tax treatment of one’s dermatology practice is an important decision. Historically, many advisors to medical practices felt that avoiding potential double taxation made the S corporation the logical choice. This “conventional wisdom” often overlooked the potential benefits that a C corporation offered. For many practices, the C corporation was the superior structure.

Following passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017, an advisor’s determination became even more complex, as tax rates for C corporations fell to a flat rate of 21 percent and the new Section 199A created a confusing Qualified Business Income (QBI) deduction for pass-through entities such as S corporations.

Here, we will outline the basics of S and C corporations and how they can be used by medical practices in the post-TCJA world.

The Basics of Corporations

First, let’s assume that your dermatology practice is either an S or C corporation. There is little reason for a solo practice to operate as a sole proprietorship. This choice of entity can result in unnecessary lawsuit risk, as well as the inability to take advantage of many valuable tax-deductible business expenses mentioned in this article. A general partnership as a legal structure is also very problematic for asset protection because it leaves each partner’s personal assets at risk to any act or omission of the practice and any partner. Nonetheless, partnership tax treatment can be beneficial, due to the ability for partners to specially allocate expenses or have unequal distributions. This is why you often see limited liability companies (LLCs) taxed as partnerships—especially common when it comes to owning medical practice real estate or valuable equipment.

For the purpose of this article, we will focus on comparing C corporations and S corporations for the medical practice.

All businesses that incorporate are automatically C corporations absent an election to become an S corporation. A practice organized as an LLC can choose to be taxed as a corporation, which would default to taxation as a C corporation unless an additional election is made to be taxed as an S corporation. Both S and C corporations have separate tax ID numbers and are required to file tax returns with the federal and appropriate state tax agencies. Both entities have shareholders and can be created in any state in the country.

C Corporations

When a C corporation earns profit, it must pay tax at the corporate level. Profit is the difference between income and expenses. Compensation paid to physicians, as long as it is reasonable, is deductible by the corporation on its tax return (and is therefore not taxable to the corporation). The salary received by the owner is taxable to the owner as wages. After the C corporation pays taxes, distributions of earnings already taxed at the corporate level can be paid to the physician-owners in the form of dividends. These would generally be taxed to the physician-owners as qualified dividends, thus leading to the “double taxation” of such earnings. Qualified dividends are currently taxed at long-term capital gains rates, which will be 15 percent for individuals not in the highest tax bracket and 20 percent for taxpayers in the highest individual income tax bracket. Therefore, a C corporation physician-owner will pay 21 percent corporate tax on net profits of the practice plus either 15 or 20 percent tax on the dividends distributed by the corporation. This results in a total of up to 41 percent Federal tax on these profits.

S Corporations

An S corporation is also a separate entity that must file its own tax return. However, the S corporation is often referred to as a “pass through” entity. Rather than paying tax at the corporate level, all income and deductions pass through to the shareholders and the shareholders must pay tax on any S corporation income at their individual rates. Whether the income to an S corporation is paid to the physician-owners as salary or as a distribution will not impact the federal or state income tax rates that will be applied to that income for the physician. There is never any tax to the corporation; therefore, there is no “double taxation” in an S corporation.

When an S corporation owner provides services to the entity, such as a physician-owner practicing medicine, the owner must be paid reasonable compensation in the form of W2 wages. These wages are a deductible expense to the corporation and are also taxable on the owner’s individual income tax return at his or her individual income tax rate.

Planning Within Your Entity

Many physicians think of S and C corporations as having exactly the same benefits. Since the C corporation has a potential double taxation, many doctors and their advisors elect to make an S election to avoid one more potential problem. Others think a C corporation must be the answer in the post-TCJA world because of the new lower 21 percent flat tax rate.

The double taxation problem in a C corporation can often be avoided by reducing practice profits to zero, or close to zero, at the end of the year with reasonable compensation and bonuses paid to the physician-owner. Also, a C corporation enjoys a full deduction for the cost of employees’ (including owner employees) health insurance, group term-life insurance of up to $50,000 per employee, and even long-term care insurance premiums without regard to aged based limitations. The C corporation can also deduct the costs of a medical reimbursement plan.

If one has a small corporation and a lot of medical expenses that aren’t covered by insurance, the C corporation can establish a plan that results in all of those expenses being tax deductible. Fringe benefits such as employer provided vehicles and public transportation passes are also deductible. If the practice has rental activity, a C corporation has the advantage of using rental losses to offset operating income. In addition, under TCJA, C corporations avoid alternative minimum tax. However, all salary and bonuses paid to the physician-owner as compensation are subject to Medicare tax (as high as 3.8 percent).

In contrast, health insurance paid by an S corporation for a more than two-percent shareholder is not deductible by the corporation. The shareholder must generally take a self-employed health insurance deduction on his personal return. Long-term care premiums paid through an S corporation for these shareholders are also not deductible. The shareholders, in deducting them personally, are subject to age-based limitations. Shareholders of an S corporation must treat rental losses as a passive activity subject to the passive loss and at-risk rules. An S corporation owner, however, may be able to take some of his compensation in the form of reasonable W2 wages and take a profit distribution from the S corporation, which is not subject to Medicare tax, potentially saving thousands of dollars in Medicare tax.

Under the TCJA, a Qualified Business Income deduction of up to 20 percent was established with new Internal Revenue Code Section 199A. While medical practices are considered to be a “specified service trade or business” and thus excluded from this deduction, individual taxpayers whose taxable income falls below certain thresholds may still take advantage of the 20 percent QBI deduction on income from their pass-through entities.

Get the Best of Both Worlds— Why Not Use Both?

Many dermatology practices can take advantage of both C and S corporation benefits by setting up two distinct entities to operate different aspects of their practice. Perhaps the S corporation will be used for the operating side of the practice (professional practice of medicine) while the C corporation will be used for management functions (billing and administration) or for a retail function such as sale of dermatology products, or vice versa. The practice as a whole can take advantage of the tax deductions afforded a C corporation and the “flow through” advantages of an S corporation. The combination of the two entities may also provide some additional asset protection. As long as all formalities of incorporation are followed, as well as compliance with rules for employee participation in all benefit plans, medical practices can benefit from this dual corporate structure.


Choosing the tax treatment of one’s medical practice is an important decision, as it impacts the tax paid by every physician-owner. Careful consideration of the pros and cons of S and C corporation tax treatment is necessary, especially in the post-TCJA world.To receive free print copies or ebook downloads of Wealth Management Made Simple and Wealth Protection Planning for Dermatologists, text PRDERM to 555-888, or visit and enter promotional code PRDERM at checkout.

OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.

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