Dental Practice Purchase Financing - S-Corp

I am planning a start up office and getting a loan from B of A, I want to know what is best for tax purposes, to make me the borrower or the corporation the borrower. The finance guy I am working with says it’s best to be the borrower. Any advice on this? Regardless I am going to personally guarantee the loan.

Depends.

If you're an LLC, it really doesn't matter and I suggest having the entity as the borrowing entity as long as the LLC doesn't elect to be treated as an S-Corp.

If you're an S-Corp AND you want to have the ability to deduct any potential tax losses, YOU must be the actual borrower, NOT the entity. You will then lend the S-Corp the money, the S-Corp will owe YOU. This will give you basis in the S-Corp and allow you to deduct losses if any.

IF the S-Corp is the borrower AND you don't have any money on the table yourself, you will NOT be able to deduct any losses generated at the S-Corp level until you have tax basis.

Personally guaranteeing an S-Corp loan is NOT the same as being the borrower and will NOT allow you to deduct the losses without tax basis.

This is excellent advice. I was hoping that for all the visuals out here in the real world, if you would use this philosophy in an example that would show the young doctors how this might be an effective tax strategy for them.

Additionally, if the buyer personally borrows the money, loans it to the S-Corp which purchases a practice. Who amortizes the goodwill etc.?

The buyer of the assets amortizes the goodwill, the lender is simply the owner and the owner will "owe" the bank.

Please explain how the basis issue relates to the doctor’s personal return and the ability to offset certain losses and why this isn't double dipping. For example, the S-Corp writing off the purchase yet the doctor can personally use the loss against his personal gains.

I’ll try and keep it simple and stick to the "trap" that S-Corps can have. A few assumptions first:

1. Doctor has been working as an associate (employee) during the year earning $100k.
2. Doctor creates S-Corp to buy a practice
3. S-Corp has operating losses of $50k for the year.
4. The "bank" agrees to lend 100% of the purchase price so the owner won't have to kick in any money.

IF the borrower as defined in the loan documents is the S-Corp, the individual will have taxable wages of $100k to pay tax on. The loss of $50k will NOT be available to the individual to use against this income for this taxable year.

Here are a few fixes:

1. Have the loan documents with the individual as the borrower (you've probably guaranteed the loan anyway) and you lend it to your S-Corp. THIS will allow you to take the $50k loss.
2. Go with an LLC (assuming your state allows them) and have the LLC as the borrower. THIS will allow you to take the $50k loss. You can elect to be taxed as an S-Corp later on WHEN it makes sense.

As with anything you do, get good advice and plan accordingly.

I hope that helps.

This post first appeared on Dentaltown.

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Should Dentist Leave Existing Practice and Start from Scratch?

Hi, I have a pretty successful practice which I purchased almost two years ago...my numbers are pretty consistent, and I’m making a decent living (although I always worry about what the following month will be like). Anyways, I’ve been thinking for a few months now of starting a practice from scratch. I would LOVE to start something from scratch in another town, maybe a coastal town near L.A...if I did this, I would hire only ONE person...yes, just one...so, this new practice would be just me and one front/back person...I would work there a couple days a week, but I’d have that one person there full time...I’d want the doors to be open....so, what are your thoughts about his?

What are the odds that I don't meet my overhead (I think it will be around 5,000/month)...

How much can you produce a day now? Do you do your own hygiene now? If not, how will doing your own hygiene affect your daily production? What’s the business plan say in terms of OH and/or capital needs? What are the demographics in the area you're looking at?

Do dentists ever go out of business? (I’ve read statistics that say it's the least likely business to fail).

Yes

...please...any insights, ideas, arguments, ANYTHING would be greatly appreciated.

How will this impact your existing practice? Will you put in less time in your existing practice? Will you pay less attention on your existing practice (when the cats away, the mice will play)? Will you burn yourself out between the two practices?

My current practice is solid...two days of assisted hygiene where the hygienist sees about 12 people and one day of traditional hygiene, production averages 70,000/month. I think my overhead is about 70%...I think my practice could me more efficient, and I am working on that, but there are so many people I have to manage that I sometimes have no energy to address certain issues.

And you think going through the process of a scratch start won't add to your things-to-do list and where will your additional energy come from if you don't have it now?

Will you be selling your existing practice first? If not, where will the energy come from to operate TWO practices when you don't have the energy to operate one?

There’s a disconnect.

Also, another reason why I want to start something from scratch is because I would only hire ONE (well, maybe two) person someone who would be front and back, no hygienist. My overhead would be so low I could probably work less and make the same money. I know a couple of guys who produce ~$300,000/year, but take home two-thirds of that. LOW OVERHEAD...does my train of thought make sense at all?

Depends on what you plan for the other office. Also, what does your business plan suggest in terms of your "income" from this new office and how long will it take you to achieve that income?

This post first appeared on Dentaltown.

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Associate Dentist Wants to Buy into Dental Practice - Questions

I would like to resolve my situation soon.

I have been an associate for 5 years in a practice, well-compensated (40 % collections minus 50% lab). I left another partnership to pursue this associateship full time last year, working to a future partnership buy-in. Last year production about $1 million, although it did drop off the last 4 months due to the recession. Also last year, the owner completed a rather large build out in a new office space, probably in the $700k range (via loans).

My question is: do I buy into the loan amount when I do buy in, and if so, does that reduce my buy-in amount?

Depending on the structure of the buy-in, yes, any debt reduces the asset value in terms of YOUR buy-in figure. That’s because after you buy-in a portion of your profits will be going towards reducing the debt.

Think of it like this, there's a house you want to purchase that's been appraised for $100,000. If there's a mortgage on that house for $80,000 AND it's assumable, you would pay the owner $20,000 for the house, NOT $100,000 because you're also taking on the debt. If you bought a 50% interest in the house your payment would be $10,000 and each of you would be responsible for half the debt.

Make sense?

If not, is it a good idea to even consider buying in to a practice with a large liability?

Depends, might be a blessing! Might mean minimal upfront money from you! What about the large asset?

He is also talking about not including the equipment in the buy-in figures, that by the time I buy in, it will have depreciated to a point where I would be paying more than I should for it, that he's doing me a favor to keep it out of the equation. That's confusing to me.

Me too.

Now for some reason, maybe because of the recession and/or the build out loan, he has yet to show me anything resembling an agreement, or any idea of how much he wants for a buy-in amount , keeps putting me off (it's been about a year since we first talked about partnership). I can guesstimate, but I don't want to work here and find out later that his figure is too high/not workable. My other option would be purchase a place of my own now, instead of waiting (my plan B). Looking for input?

Press the issue, PRESS THE ISSUE! Ask for a written proposal by the end of next week, or a timeframe you're comfortable with that's shorter rather than longer. Say that unless you begin to see the ball rolling you have to consider other opportunities.

Thanks!

This post first appeared on DentalTown.

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

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Dental S-Corp Fair and Reasonable Compensation Question

For those who are an S Corp, what ratio of overall compensation to the dentist should be classified as salaried as opposed to dividends? I do the payroll but I'm thinking I've got my husband (dentist) salary too low. As I look at the end of the year numbers, I'm afraid I'm setting us up for an audit by pulling out too much money as dividend income that we aren't paying SS or Medicare taxes on. In terms of overall compensation, is there a ratio that is "safe" enough to not be a red flag to the IRS - like 80% salary, 20% dividends?

It has little to do with ratio of W-2 to dividends and everything to do with "fair" or "reasonable" compensation for services rendered.

Don’t let the fear of an audit make you overpay. Here’s an real case\client:

I have a client who owns a 50% interest in four fast food stores. He and his partner took W-2 wages of maybe $4k each for the past 10 years or so. Their dividends each year were easily $300k+ each. This was one of my S-Corp clients that got audit because if low wages. You’d think they got screwed right?

Nope, it's facts and circumstances.

My client is a dentist and works 5 days/week in his practice, his partner in the fast food stores lives about 1,000 miles away in another state and has his own construction company. They have a full time manager to oversee ALL the stores and each store has its own manager. My clients W-2 wage is paid for his services at quarterly or semi annual meetings to discuss store operations and performance.

IRS audited and left it alone. So it's not about a ratio of wages to dividends, it's about "fair" or "reasonable" compensation for services rendered.

So is Fair and Reasonable considered what an average associate might be hired for to perform the same job duties?

Generally, yes. Look at what your husband produces and consider what you might have to pay someone to replace that production. You’d have to consider the same question if he became disabled, god forbid. How much would you have to pay to get someone in there to produce what he does? Is it a flat salary? Is it a percentage of production, percentage of collections? Obviously you want to hire someone for the least amount of money the market will bear. You’d also need top consider any management duties he might perform, UNLESS they could be shifted to someone else, which is usually the case.

I thought the average salary for a dentist was somewhere around $150,000 a year, is that a good bench mark?

That's certainly one number to consider, however, if that's an average it may NOT be relevant to your specific situation, that's where a percentage of production or collection may actually be closer to reality. So again, it simply gets back to what you would offer someone off the street to produce what your husband produces.

This post originally appeared on Dentaltown.

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

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Dental Partnership Questions

We are in partnership for 8 years now and no major disagreements yet! However, there have been changes since the partnership began and the issue of the share of rent has only arisen since the joint ownership of the building and the decrease in working of hours my partner. At what level do you generally suggest an option out if he continued to significantly decreases his hours in the years ahead?

Thanks and great question.

I’ve generally used days or hours worked, NOT a production based threshold. For example, if both partners are working 36 hours per week on average, the threshold might be 18 hours (50% of the other partner). Meaning, once one partner is working less than 18 hours per week on average, they should NOT be an owner. Could be 24 hours (or 3 days) if you wanted to make it more stringent. There could be other financial disincentives to decreasing hours as well, a lower percentage of the hygiene profits (less then 50%), if an association is brought in, a lower percentage of their profit.

Maybe below 24 hours they simply get percentage of their collections, say 45%, below 18 hours they must sell.

Again, I like to keep it simple, however, I realize that sometimes there may be a need for multiple thresholds.

If you have an associate do you split their income 60/40 (for example)?

Again, try to keep it simple. One way to look at the associate, specialist, etc. is that any NET profit they generate is simply THEIR contribution to the OH. Therefore, the total OH that is being split, shared, allocated is less for the owners. How ever you've decided to split OH or profits will automatically include the NET profit of those profit centers.

If you sublet that would simply reduce your rent expense if you share that 50/50.

This post originally appeared on Dentaltown.

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

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Graduating Dental Student Questions

I'm a 4th year dental student and I'm interested in learning more about the L&M and GPPR concepts. Has anyone out there done a GPPR and how did it work out for you from the new doctor or the owner doctor's perspective? I know the basic idea is that the new doctor gets paid a set salary that is much lower than an associate pay, but at the same time they build up equity in becoming a partner. Couple of questions...

1. With new doctors graduating with $200-300k of debt, how were you able to pay your bills and still live?

My response is obviously not from personal experience, however, from what I’ve seen, the student debt usually has very favorable terms so that initially, the payments are low, maybe interest only with reasonable interest rates and the minimum payments increase over time, in theory, as the doctor’s compensation does.

2. What happens with the equity earned if the new doctor and the owner doctor decide to part ways before the partnership is finalized?

This is where you need to be careful and make sure you have good representation. You can have the agreement call for some type of severance payment to the associate as payment for their "equity" they left behind. Payout can be anywhere from 12-36 months usually.

3. If the practice has debt is that amount deducted from the previous year's collections when determining a buy-in price?

No, debt should be a direct, dollar-for-dollar reduction in the agreed upon "value" of the assets being purchased. If the transition is a part stock part earnings shift method, then the debt should have been factored into the equation, lowering the potential buy-in figure.

4. How many active patients, new patients/month, etc. should there be in order to support the number of partners? I.E. 2k/doctor, 20 patients/month?

Generally I believe active patients should be approximately 1,000 per doctor, for every 1,000 patients I think I recall reading that new patients should be approximately 30% (or 25ish new patients per month)

Any other advice/info would be much appreciated.

Hope that helps.

This post first appeared on NewDocs.

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

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