Ten Tips for Year-End Dental Tax Planning

Here I am at home today hoping I didn't pick up the swine flu bug that we think my 12 yr old is just getting over. So what can I do? Write a blog of course! I thought I'd do a follow-up from my August blog about planning, now that we're preparing for our round of year-end meetings.


Erik Parrish CPA wrote a great blog about ROTH IRA's and the planning opportunities that are just around the corner in 2010. However, just before the corner is year-end 2009 and there's plenty of time left to review where you are so far in 2009 and what you might want to do to finish out the year to position yourself in the best possible income tax "light". Here are just a few ideas that we'll be discussing with our clients prior to 12/31/09:

1. For LLC's, PLLC's and sole proprietors, is it time to elect to be taxed as an S-corp? C-corp?

2. For those w/o a practice retirement plan what options remain for 2009 and when do you need to make a decision? Will that plan still be the best option for 2010? If not, what does the client need to do as of Jan. 1st and when do we discuss a different retirement plan for 2010?

3. For those with 401k/PS plans, what are the minimum & maximum amounts you can contribute and what makes the most sense. For 2010 and the 401k portion should you do the traditional deferral or the ROTH deferral?

4. For those clients that started or purchased a practice in 2009, when do we need to decide what type of depreciation we take for 2009? Do we take as much deductions we can in 2009 or hold off and use the in future years where they may be more valuable?

5. For those considering ROTH conversions inn 2010, what can/should they do in 2009 to plan for that conversion? What about those clients I mention in #4 above?

6. For clients looking to expand soon and given the option of doing it in 2009 or 2010, which would be better?

7. Are the clients taking full advantage of all the "perks" that the practice of dentistry provides, how do those deductions "compare" with their peers?

8. How is 2009 looking compared to prior years, compared to your peers 2009 numbers? What about specific key performance indicators, how do they compare with prior years and your peers for 2009?

9. Take a look at any other issue that could impact their business income tax picture for 2009, 2010 and beyond.

10. Review their individual income tax projection for issues that may impact them in 2009, 2010 and beyond like other income, potential capital gains & losses, itemized deductions, rental or vacation properties, 2nd homes, other tax favored investments like oil/gas partnerships, annuities, etc.

Each client really is different and while there are many tax strategies that nearly all clients should consider, there are very specific strategies for each client based upon their individual situation. An example of that are children, those clients that have them may have some additional tax strategies they should consider vs. those clients without kids.

I stopped at 10, there are so many more. Every one of us should make sure we review our own situation to ensure you're paying the least amount of tax under the law this year and in future years.


This first appeared on NewDocs.

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

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Dental Practice Valuation for Deceased Dentist's Family

I have a close friend that passed away last week unexpectedly. He had a heart attack at age 54 with no prior symptoms. It really was a bummer. His wife has a prospect to buy the practice. He’s a good guy and it could work out perfectly. The big question is the value of the practice.

I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.

Please chime in thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.


There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly.

Good luck.


Tim,

Could you do the valuation from the P&L and balance sheet, without seeing the practice?

Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.

This post first appeared on Dentaltown.

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

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Dental Commercial Property and and S-Corp Election

This is our one hundredth post. Nice milestone.

I have heard it said that the best way to go about owning a building and practice is to have the building set up as an LLC and the practice as an S-Corp, with the LLC renting out the building to your S-Corp practice.

Assuming this model is followed, would the following be legal:


Let’s say you own a building with enough space to house multiple businesses. You start off with your practice set up in one area/wing/whatever of the building and rent out the rest of it. Perhaps you plan to use the extra space in the future for expansion, but that really is not important. Commercial real estate hits a rough patch and your LLC comes dangerously close to failure. Your dental practice is still rather successful. Would it be legal to "renegotiate" and jack up the rental rate on your dental practice so as to help your commercial property LLC get through the tough times? The basic question here is whether or not it is legal to essentially use the rate charged to your practice to mediate the bumps felt by your commercial property. (I suppose the reverse of this situation is possible as well, with you lowering the rate charged to a struggling practice by your successful commercial real estate... but this situation seems unlikely at best)


Or you could simply use the S-Corp profits and lend them to the LLC to keep it afloat. Assuming you're the sole owner of each both flow through to your ind. tax return so the net tax benefit will be the same.


Remember, the S-Corp needs to act in a prudent business fashion. If it's already paying "fair market" rent and you didn't own the LLC and the landlord asked you to renegotiate the lease to pay more rent, would you still do it? The answer is no.

Don't make it more complicated that it needs to be.

And our good friend, Jason Wood, the Dental Lawyer adds:
 
The only thing I will add to this excellent answer is a real world experience as to why it should be done this way as opposed to renegotiating the rent and putting it in writing.


A client that contacted us after-the-fact had entered into an "above average rent" with his dental practice for the building that he owned. Because it was a part of the lease there was a paper trail. When he lost the building as a result of the economy we are in, the bank "relied" on the above market rental rate outlined in the lease to force the dentist to continue paying the above market rent.

In other words, don't renegotiate your rent, do what Tim suggests instead. Lend the LLC money personally so that if you lose the building it isn't attached to your separate entity.

This first appeared on Dentaltown.

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

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Is Dentist Truly Being Paid on Production?

Can you tell me where I can find legal definitions of "production" and "collections" as they relate to dentistry?



I've just started working for a group practice. I have a contract (as an independent contractor) that states that I will be paid "30 percent of the production resulting from dental services provided by" me according to their standard fee schedule. I was happy with that until I discovered that they are trying to call their collections "production" and compensate me accordingly. (The word collections is not mentioned anywhere in my contract.)


Some of the things they are claiming according to this nomenclature are that when they run a promotion for a free exam (etc), since they are charging nothing, it doesn't count as "production" and I get paid nothing. If they discount a fee, it discounts what I get paid. They also said that if a patient defaults on their payment, that it retroactively counts against my "production" and is backed out of my pay. (Of course, since I'm not an owner, I have no say what promotions get run, or when.)


Naturally, I'm contesting all this, since it would basically give them carte blanche to not pay me for whatever they decide not to charge for. In school, production was always defined as "the procedures you perform" and collections as "what the patient/insurance actually pays." Is this incorrect? Can anyone help me find official definitions of these terms? I'm really hoping I don't have to involve an attorney.


Thanks!

 
First, different people use the term “production” very loosely. While one might expect it to mean the number based upon the practices fee schedule, many people simply use it to fit their needs. You’ve learned a very valuable lesson, which is (and this is for every associate and owner dentist):


Make sure you define these terms in your agreement. As an associate, if you get a contract that says you'll get 30% of production, insist that a definition be inserted that your dental attorney is comfortable with. The same goes for many other terms thrown around in agreements, compensation, professional expenses, full time and part time, just to name a few. Use examples if you must so it's very clear.

Check with the ADA as to their definitions. They put statistical information out there and they must have "standard" definitions for these terms.

Good luck. You’re right to contest this.

This first appeared on Dentaltown.

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

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Can Dentist Carry Losses Back to Prior Years?

Two questions:



1. Do I have to pay taxes for purchases made over the Internet from other states?  I thought I have heard many times that congress intentionally set a law that inhibits taxes for these purchases to encourage the growth of the Internet.  Has that ended? Was it for non-business purchases only?


2. Started up this year from scratch, so I have tons of write-offs and not a lot of income.  I think I remember hearing somewhere that you can go back to the previous year and get some refunds off that return since this year was so bad.  That doesn't seem right though, am I remembering that incorrectly? 
 
You're allowed to carry back certain losses to previous years, so you heard correctly. What you need to determine is whether or not it's best to carry back those losses if they exist, or carry them forward by not taking as many deductions this year to create a loss.
 
This first appeared on Dentaltown.

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

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What Happens When A Dentist Renovates Their Office Now?

Our friends at Dental Office Designers have sent us another article about the advantages of renovating your office now. Click here to view the article.

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

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Dentist Has Questions About Creating Associate Agreement

I am in serious discussions for the first time in my life with a new dentist who wants to move to the small town I practice in, and work with me. Thank God, as I am and have been swamped for years. He is willing to come on a trial basis, and bring his family. My practice is in a town getting ready to grow dramatically, and is very technologically advanced, so I will have alot to teach him, which is, frankly, probably one of the reasons he wants to come.

I like him and I think this could work but I have absolutely NO experience in this. I know we need a written agreement but I have no idea what is fair to him, how compensation should be structured and how a buy in should be managed....input would be appreciated so I can start this process fairly for both of us.


Thanks
 
You should consider hiring someone that helps owners with associates and buy-ins to help you though the process, not to mention a dental specific attorney for the contracts. some steps to consider:


1. In addition to the base compensation, what professional expenses will you pay, which professional expenses will you expect them to pay?

2. Who pays for health insurance? The malpractice? If it is split, how?

3. If you have a retiremet plan, how will that impact your cost of the associate?

4. How many days initially do you went them to work? What hours? Any specific days? What happens as they get busier?

5. How "new" is the dentist? Do they have any track record on their production ability? If so, estimate that based upon a daily production figure and estimate what that means to your practice in terms of collections.

6. How will it impact your hygiene department? Maybe it won't.

7. Will you be ok cutting back your schedule? How much ?

8. Do some cash flow projections to see how it will impact you. Prepare a best case & worst case scenario. Consider the additional costs: assistants, front desk, supplies, lab, etc...

9. If buy-in is to be considered, what will be the valuation date? Should there be some increase in that price for normal growth NOT associated with the new doctor?

10. What type of entity are you now & should you consider alternatives based upon another doctor in the practice with a potential buy-in?
I figure these 1st 10 steps will keep you busy for now. The first several steps can be the basis for a letter of understanding that you & the associate should agree to. This will be given to your attorney for the employment agreement.
 
This first appeared on Dentaltown.

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

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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