Saving for Dental Building Purpose

I am set up as an S Corp. Is there any way that I can "save up" for the purchase of the building without having to pay taxes on that money?

No, that "money" represents s-corp profit which will be taxable. There is just no way around that.

I need to save about 160k for the down payment, but as I get close, the year ends and I have to pay personal income taxes on that since the "profit" from the S corp turns into "income" on my personal return.

Yep, taxes will be due. If you receive gifts or loans as part of your $160k needs those are not taxable. However, lenders may not count that towards your down payment requirement either.

I just want to save the money up without having to pay personal income taxes on it since it's a purchase for the practice by the practice.

If the generation of these moneys is from a taxable activity you'll pay taxes on it.

Why do I have to pay it with my personal money?

Because those are the rules of being an S-corp., any profits remaining in the entity are taxed on your personal return.

Is there anyway to place this money into a certain type of business account so that it isn't taxed?

You could create a retirement plan and fund it with some of those dollars, not $160k though and you'll probably have to share it with your employees. I’ve been hearing of folks using their ret plan assets to invest in real estate though I don't know the details.

The bottom line is you'll need to pay the tax, there's just no magic way to avoid it.

Tim, slightly different version of the same question. We have the dental practice as an S corp also but we do own our building which is held separately in an LLC. We pay rent each month from the practice to the LLC. Could we bump our rent by, let's say $1000 a month, and leave it in the LLC without being taxed? So a pool of money for future repairs would be accumulating but in the LLC instead of the S Corp?

Depends on the expenses of the LLC. the $1,000/month IS additional income to the LLC and if it adds to the LLC's taxable income, it will be taxable to someone. IF the LLC has taxable losses in excess of $12,000/yr then theoretically you could "shift" income to the LLC of $12k and NOT create a tax liability.

Just be sure the monthly rent remains reasonable for the area and the services covered in the rent. And make sure the lease allows the LLC to increase the rent by $1,000 to the s-corp...

This post first appeared on DentalTown.

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Dental Practice Purchase Scenario

The practice that I want to buy is in a metropolitan area in Northern Virginia (roughly about 400K) with a 3 chair ops. The gross production is around 450K for 2 days - fee for service. Patient pool is about 600 active patients (fee for service).

I know the area & the area has grown tremendously over the past 10-20 years & continues to grow, maybe not at the same pace, it's still growing though. Also, having a ffs practice in that general area is an achievement in itself as the demogrpahics of the area trend towards insurance participation by many residents.

The gross prod & patient count seem about right for a 2-2.5 per week practice.

This practice is one of two locations that I am associating right now since 06.

Let's dive into a little more about who the patients WANT to see. You've been there since 2006, it's now 2008 so you've been there 2+ years. Were you doing the 2 days per week in this location or was the owner sharing the time with you? If you were there by yourself then the concern about who the patients will want might be moot. If you split the days, it would be interesting to know how the prod broke down for 2007 & year-to-date 2008.

It is owned by the senior doctor. It is 5 miles from the other practice.

My concern is about the 5 miles IF you were splitting the 2 days with the owner, if not, these patients clearly have chosen this office & you & the 5 miles would be less of a concern with me and you can work the agreements in such a way that the owner can't soloict those patients and if any do move to the other lcoation they could compensate you for them.

Originally we were going to do a 50/50 partnership but after going through some negotiations we decide that I better off buy one location straight out.

Let me know your thoughts.

Thanks in advance.

This post first appeared on NewDocs.

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Dental Practice Purchase Offer.

I have been negotiating with a local dentist for a couple of months and recently, we came to what I feel to be very fair terms for an associateship opportunity with a delayed sale. Associate for 2 years, paid 40% of production. I pay my own lab fees. CE $$ as well. After 2 years, it would have been a 100% buy-out. That was the original plan.

Tonight, he brought up a unique structure of a transition. He said his CPA and attorney formulated the plan trying to improve the tax advantages for all involved. I need your advice on what tax advantages are present for both the buyer and the seller.

Asking price $840K

He is most interested in me having a "vested interest" in the practice. An interest so strong that he will not be caught in two years with me leaving and he having to begin the whole process all over again. I completely understand this. He'd like me to buy 25% of the stock of the business when I begin (210K) creating this vested interest. However, the associateship lasting 2 years would still apply. He then went on to say that he believes, based on his CPA and attorney's advice, that me, the buyer, would be able to borrow money from the corporation at year 2, paying for the final 80% of the practice. By doing this, am I able to pay the debt service pre-tax? And I assume I'd still be able to deduct my interest.

I told him I am obviously interested in owning 25% of the stock, but with that means that I'd be paying back the debt to that borrowed $$$. Because I'd own 25%, wouldn't that warrant that I receive 25% of the hygiene production? From the way he understood it, I would still only make my associateship compensation with no hygiene production. I am not educated in taxes and many of these matters, but to me, I don't understand how this can work. I understand that he wants a commitment and I'm willing to give that commitment to him, but I cannot borrow $210K without a means to pay it back.

This doc is a very generous and honest man and I know he is not trying to put me in a bad spot. I need your thoughts. Thanks in advance.


What they APPEAR to be suggesting is a buy-in\buy-out that is done with a combined stock purchase\earnings shift\deferment\differential method. The fact is this is a VERY common method and while I generally agree that an asset purchase may be preferable in most cases, buying stock isn't the devil that some make it out to be in reality.

That said, IF they continue to have you buy the other 75% in year two then you should stick to your guns and make it an asset purchase and DO NOT buy stock now. There's NO WAY to buy the other 75% as a stock purchase and do so with pre-tax dollars, can't happen and I think I'm missing part of the proposal simply based on that part of your post.

It almost sounds like they want you to pay 25% of the purchase price now for stock (or maybe a deposit against 100% of the stock to be held in escrow) and potentially pay him out over 5 years beginning in 2 years as some form of severance, deferred comp or mgmnt type compensation that the corporation can deduct.

Again, THAT's what it sounds like.

If they want you to have a vested interest, an approach would be that you DEPOSIT $25k now and in two years do the deal. If you walk within the two years, you lose the $25k or a portion of it depending on when you walk. If they terminate you within 2 years they give it back PLUS some add'l severance payment equivalent to approx. $2k per month you stay there (so if they terminate you in month 23 for no good reason, they give you back the $25k AND they pay you another $22k over a year). Of course there would be conditions placed on termination.

Now, is that a good deal for you? Who knows, I don't know you OR the situation.

The bottom line is that it's time for you to make a nominal investment (in the grand scheme of things) NOW (if you truly see this as your future) and hire a professional who handles transitions to represent you.

If you're buying 50% why consider an asset purchase? You purchase a 50% interest in the assets of the C-corp & maybe a 50% interest in the owner docs personal goodwill (that needs to be addressed by his advisers). There is an added level of complexity to this approach, however, for the buyer(s), who in theory will ultimately own the practice, they aren't stuck with an old c-corp they don't want or need and you use an entity that allows for more flexibility in future sales\purchases of interests in the business.

This post first appeared on DentalTown.

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Dental Practice Purchase Question

Gross average: 1.5 million
Net: a little over 800k
Patient active 12 months: 1800
NP/month: approximately 12
Building owned and for sale separately
8 chair practice
95% C&B, Implant and removable
FFS+ Delta premier only
Hygiene only generates 280k/year. I believe 8 hygiene days. Very little soft tissue management.
Dentist takes a month off a year.
Sale price: 1.05 million

I’ll start the list of questions:

1. How many docs? If one, can you produce $1.2mill/yr?

2. 8 hygiene days equates to approx. 1,500 patients going through hygiene recall with a good recall system and approximately 6 weeks off. How was the 1,800 arrived at, any idea? Hygiene gross of $280k is about right for 1,500 patients.

3. Average doc prod should be about $900k, here its $1.2million. Any procedures being done that you won't\can't do?

4. Selling doc staying on board? Leaving ASAP?

5. How’s the equipment? Facilities? Any major investments that need to be done?

6. Location good for future growth or at least maintaining of existing patient base?

7. Must real estate be sold with practice? If not, what's the lease arrangement? First right of refusal an option?

Comments:

1. If net is accurate, looks fantastic

2.If net is accurate, price seems good

3. How much due diligence have you done so far?

Go to either http://www.dentalcpas.com/ or http://www.newdocs.com/ and grab the checklist for a practice purchase. From a financial perspective it provides a good bit of the initial documents you'll want\need to see and once you've analyzed that info it usually generates more questions. newdocs.com also has other checklists for this type of project you'll find helpful.

So specifically, there's nothing more I can add w/o seeing a lot more specifics.....

This post first apepared on DentalTown.

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Is An Associate Dentist Paying Electrical Bills Typical?

I have been an associate for over 3 years, happy where I am- we have a good relationship. Business wise, I receive 40% collections and the lab fees are split 50/50. Recently, the owner dentist has been taking half of the electric bill out of my paycheck (stating that the bill is high (about 320/per month)). Also, the half of the monthly bill for nitrous and oxygen tanks have been getting taken out of my paycheck.

Now, I am just curious- is this common? It seems unfair to me, just wanted to know if anyone else does this.

Thanks for input.


It’s pretty simple, what is allowed to be deducted under your employment agreement?

To answer the question, no, these are not typical deductions to associates compensation.

This post first appeared on DentalTown.

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Increased Compensation Models for Dentist in Office

I have purchased a practice a couple years ago, and the previous owner (who I get along with great and couldn't be happier that he is still around) is now requesting that he increase from 30% production to 40% production. The reasoning is fairly deep, but I'll give somewhat of an explanation.......



He does regret that he sold the practice, and now we want to expand the practice and really put a lot of energy into it. He states that he feels that in order for him to be able to do all of this, he feels that he should have an increase in his pay. Any thoughts would be appreciated.


The overhead for him will NOT be 60%, it will be less. To find out how much less, run the numbers, it's not that tough. I suspect at MOST, as a percent, the additional cost for his production is somewhere between 30-40%, lets say 40%, he gets 35%, that's a total of 75%, so you're still getting 25%. Meet him in the middle and move on.



If in fact the OH for his production IS 60% you have bigger issues then his compensation.


This may generate some lively debate, here it goes. Lets play with some real #'s:



Lets start off with a typical one doctor practice, hygienist does $200k, doctor does $600k, total is $800k with overhead at 60% that's $480k. Of that overhead, generally, somewhere between 25%-30% is FIXED, which means, 30%-35% is variable, or driven by production.



Let’s assume we add another practice on top of this IN THE SAME FACILITY AND we don't have to add space or equipment. You simply schedule the use of the facilities accordingly. So you add another doctor that does $600k and an additional hygienist that does $200k for a total of $800k. The total practice revenue is now $1.6 million. What ADDITIONAL overhead costs have you added? Generally it's just the variable piece between 30%-35%, in my response above I suggested as high as 40% ADDITIONAL overhead by adding another doctor. So on the ADDITIONAL $800k, the ADDITIONAL overhead is $320k, giving you total overhead of $800k (original $480k+add'l $320k=$800k). $800k overhead on a $1.6 million practice is 50% overhead. This is NOT uncommon with multi-doctor practices. IF overhead with one doctor is 60%, you SHOULD see an improvement in overhead percentage when adding an additional doctor or adding additional revenue.

First, that's why I suggested that if the ADDITIONAL overhead being added for the 2nd doc is 60% (not 40% at most) then you’ll have bigger problems.

So, if that additional doctor (with hygienist mind you) is generating $800k AND the additional overhead is $320k that leaves $480k on the table to use towards the doctor's compensation. If you are paying 30% of $600k, that's $180k, you are left with $300k as the profit, not a bad deal. If you bump it to 40% of $600k, that's $240k leaving you with ONLY $240k. Heck, now you're EQUAL in compensation to that doctor. So even if you settle for 35%, you can still earn MORE off that additional doctor than what the other doctor is making.

If you want to play with percentages only, the additional overhead to add the additional doctor might be 40%, you pay them 40% of THEIR revenue (which equates to 30% of the $800k in additional revenue) that leaves 30% of the total additional revenue falling to the bottom line.

Now, I’ve tried to keep it simple, certainly there may be additional payroll taxes IF the doctor is an employee, maybe they negotiated additional professional expenses that YOU agreed to pay (insurance, dues, CE, licenses, etc.) however, those won't come close $240k or $300k.

By the way, the additional overhead items as I see them?

Lab and Supplies - 15%
Assistants, Hygienists and FD - 20% (many times the additional labor cost falls below the typical labor cost as a percentage of overhead)
Other Miscellaneous Expenses - 5%T
otal additional Overhead - 40%S

o even if you believe the additional overhead is 50% and you agree to pay the doctor 40% (of his revenue, or 30% of the total) still that leaves 20% of $800k or $160k. Still making money.

Anyway, that's how I see it and I’ll say it again, you can analyze your specific situation and determine what the additional costs are by having that doctor there and calculate what their contribution is to the bottom line to help you determine what impact an increase from 30% will have.

I believe the impact to your bottom line by this additional doctor, who you're currently paying 30%, is greater than the 10% that some believe.

Good luck.

This post first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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