When it comes to tax compliance, you do not want to run afoul of the rules. While the odds are in your favor that your tax return will not get audited, filing returns with frivolous deductions can have financially catastrophic consequences.

On the other hand, if you and your accountant do not know what tax benefits are available for you and your practice, then you may be paying way too much. Here are five common tax errors on dental practice income tax returns and suggestions on how to keep from making them.

1. Aggressive deductions of automobile expenses

It is not uncommon for a dental practice to have deductible automobile expenses. Trips to the bank and store to pick up office supplies are deductible. So are travel expenses to and from continuing education classes and other business-related events. But unless you own multiple dental offices and are shuttling between them, most of your miles are commutes between your home and your office. Those miles are personal and nondeductible.

If a dental practice owns a vehicle and is deducting 100% of the related expenses (fuel, maintenance, insurance, depreciation, and taxes), then the tax rules require a chargeback to the practice owner for the personal usage of that vehicle. In reality, this almost never happens, and the IRS knows this. This makes you an easy target for a tax assessment.

A better way to account for your business vehicle use is to own the vehicle personally and to charge the practice back at the standard mileage rate (56 cents per mile for 2014) for specific business use.

Keep adequate records of mileage, dates and business purpose.

2. Practice owner compensation is too low.

It may seem counterintuitive for an accountant to tell you that your paycheck is too low, but owner compensation is an area that the IRS evaluates in an tax examination. Here is the why:

The owner of an S corporation has two main ways to take money from his or her S corporation – wages and dividends. The obvious downside to paying wages is the requirement to remit payroll taxes on those amounts. Dividends, on the other hand, are paid free of the payroll tax obligation, thus making them a more attractive option.

The IRS is wise to the attractiveness of dividends to a practice owner, and so examining agents are trained to test whether compensation is reasonable for the position held by the practice owner. We suggest paying at least an associate’s wage level based on production. If there is additional cash in the practice to make further payouts, you are probably safe to pay the excess as dividends once the wage minimum is met. Dividends should also be paid quarterly or annually (not every pay period) so they don’t appear to be disguised wages.

3. Co-mingling personal and business expenses in the practice

Tax rules state that expenses must be “ordinary and necessary” to the business for them to be deductible. In a dental practice, there is admittedly some grey area when determining whether certain expenses are “ordinary and necessary”. Travel and entertainment is an example. If you go on a continuing education trip with your family to the beach, are all of your expenses deductible? Probably not. Instead, you likely have a mixed bag of business and personal expenses.

In cases where you have that mixed bag, documentation wins the day. Be sure that you have documents that substantiate not only the amount of the expense but also the business purpose.

And do not get greedy. Deducting your grocery bill as a practice expense because you can’t work on an empty stomach will not win you the benefit of the doubt in a tax examination! In fact, being recklessly aggressive in deducting expenses in the grey area will invite greater scrutiny over all elements of your tax return.

4. Not knowing the tax rules specific to dental practices

When your accountant does not know the tax rules that govern your industry, then he or she is costing you far more that the fee to prepare your returns. Here are some examples:

Many accountants that do not specialize in dental practices deduct the cost of dental equipment over seven years, which is incorrect. Dental equipment is deductible over five years and possibly sooner if business expensing elections are appropriately utilized.

Did you know that the depreciation period for your building is 39 years but that certain components of the building may be deducted over five years? This is a tax strategy often overlooked by accountants.

Did you know that in house crown-milling activities qualify for a special deduction available for manufacturing activities? Most accountants do not know that single visit crowns even exist.

5. Not keeping up-to-date on new tax rules specific to all small businesses

Tax rules change every year, and taxing authorities do not do a great job of promoting new credits and deductions available to the business community. Thus, the responsibility of knowing the new rules and applying them to your benefit typically falls to your accountant. If your accountant is not keeping up, you might be paying more tax as a result. Here are some examples:

If you provide health insurance for your employees, chances are you are eligible for a federal small business health insurance credit. In Alabama, you may also be eligible for a double deduction relating these same expenses.

If your practice is growing and you have added employees that exceed a certain wage level, you may be eligible for a $1,000 per employee tax credit from the State of Alabama. $1,000 in Alabama credit is equivalent to roughly $30,000 in tax-free income.

Again, these “under the radar” tax changes can save you money, and if your accountant does not know about them, then he or she is costing you money.

Most of these common errors are easy to correct on an amended income tax return, and, in many cases, you can go back three years to fix a mistake. And the good news is correcting an error often results in getting money back. So as you begin filing your dental practice returns for 2013, take a look at these key areas – doing so could save you money now and help you avoid a mistake that could cost you big down the road.