Engineering Taxable Income: Understanding the Tools Available to Practice Owners

In our last blog, we discussed income recognition strategies, specifically how practice owners can purposely recognize W-2 income versus distributions to minimize taxes and maximize long-term wealth creation. However, beyond how income is recognized, you have an set of tools as a practice owner to direct your business’ profitability and engineer your taxable income in a way that aligns with your personal financial goals.

There are two key concepts to keep in mind when thinking about income engineering:

• Taxes are inevitable. But when you recognize income, they can become optional.
• Instead of creating goals just to fit your income structure, shift your income to support your life goals.

To the first point, Benjamin Franklin said it best: “In this world, nothing is certain except death and taxes.” The goal isn’t to avoid taxes altogether—it’s to recognize income at the lowest possible rate over your lifetime. A “zero tax” year can actually represent a missed opportunity. As a practice owner, your income is often high and variable. While it might be tempting to drive your taxable income to zero by aggressively using every deduction or deferral available (including equipment purchases, pension contributions, income shifting to family, etc.), this often results in dramatic spikes in taxable income in future years.

A better approach is to smooth your income over time to avoid the highest marginal tax brackets. It is far more valuable to minimize exposure to the 35% and 37% tax brackets over a decade than it is to avoid the 12% bracket for a single year.

With that principle in mind, there are four major buckets of strategies you can use to engineer income over time:

Use profit for yourself now.

This is the most straightforward approach—pay yourself and use the income to support your current lifestyle. As we discussed in our previous article, you can split income between W-2 wages and owner distributions. A lower W-2 reduces payroll taxes, while a higher W-2 can increase your allowable contributions to qualified retirement plans. The optimal split should be tailored to your personal and business tax strategy.

Where appropriate, work with your accountant to evaluate blended-use expenses that may offer tax efficiency, such as continuing education travel, vehicle costs, home office deductions, and entertainment tied to referral relationships or professional networking.

Use profit for yourself later.

Deferring income using retirement plans is a powerful strategy. A well-designed 401(k), defined benefit, or cash balance plan can provide significant tax deferral, owner retention benefits, and long-term wealth creation. These tools shift income from high-tax years into your retirement years, when your marginal rate may be lower.

Use profit to support family and community goals.

If your financial goals include supporting your children, contributing to college expenses, or giving to your community, doing so through your practice can be more tax-efficient than giving from your personal, after-tax dollars.

For example, if your children are old enough to help at the practice—whether that’s modeling in promotional materials, performing light janitorial work, or providing administrative help, you can pay them a reasonable wage. In 2025, the standard deduction for a single filer is $15,000. If your child earns less than that, their effective federal tax rate is 0%. You can take this further by contributing up to $7,000 of those wages to a Roth IRA on their behalf. Over time, that early start can be significant: a $7,000 annual contribution from ages 5 to 18, growing at a 7.5% return, could result in nearly $4.9 million of tax-free retirement savings by age 65.

Similarly, many practices benefit from community exposure. If your charitable giving can be tied to practice promotion such as sponsoring local events, supporting youth programs, or contributing to health initiatives, you may be able to deduct the expense as a business cost rather than claiming it personally where the standard deduction or certain deduction limitations could decrease the full tax benefit.

Reinvest profit in the business.

Running a medical or dental practice is capital intensive. Equipment upgrades, operatory refreshes, and expansions can be essential for growth. While buying equipment just for the tax benefit is rarely a good idea, making necessary investments in a tax-efficient way absolutely is.

When you purchase capital equipment, you can choose how to depreciate it, including a Section 179 deduction, bonus depreciation, or standard Modified Accelerated Cost Recovery System (MACRS) . These methods allow you to accelerate deductions into a single year or spread them out over the asset’s useful life. Fast-tracking depreciation can be helpful in high-income years but spreading it out may help you capture consistent deductions at your highest marginal rate across several years.

Some final thoughts.

As a practice owner, you have the ability to shape when and how you recognize income. Being intentional with these strategies—such as shifting income between years, across generations, or into the business—can help you stay within lower tax brackets and keep more of what you earn. When you combine income engineering with sound income recognition strategies, you can operate your practice at peak profitability while still controlling how much and when your income is taxed. And don’t miss next month’s third installation in this series covering how to effectively engineer income around the tax code. If you have questions about how income engineering can fit into your wealth plan, our team would love to help you. Schedule a conversation with a practice integration advisor today!

Source: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025