Since 1956, dental practitioners have counted on our team of dental accountants and dental CPAs for high-caliber guidance and support. We take a comprehensive approach with our dental clients. This translates into dental tax planning meetings, the ability to address special dental projects, and a network of trusted dental resources available outside of our firm.
I know you have to give independent contractors 1099's when you pay them over $600 in a year. However, I cannot find a solid definition of what an independent contractor is. I know a corporation is not an independent contractor and does not require a 1099. What about LLC's (single member disregarded entities and those taxed as corporations)? Are we supposed to look up which entities are which types to determine whether they will get a 1099? It's not always easy to tell if Joe's Plumbing Service is a corporation, LLC, sole proprietor, etc. The dental lab I use is an LLC but I don't know if they are to be considered an independent contractor or not. How many of you send 1099's to your small dental labs?
In November 2010, the Court of Appeals in Michigan upheld a lower court ruling and ordered the defendant to pay a total of $1,615,000 in damages and attorney’s fees. What did he do? The defendant, the seller in a dental practice transition, opened a new practice within the agreed upon restrictive covenant area. Only about 100 patients actually transferred, which represented less than 5% of the active patient base at the time of the sale. Even so, the awarded damages amounted to 80% of the purchase price plus over $42,000 in legal fees.
One of the primary provisions found in Purchase and Sale contracts and Employment, Independent Contractor and Partnership Agreements is a Restrictive Covenant, or Covenant Not to Compete. We are often asked whether these are enforceable in Florida.
YES, restrictive covenants ARE enforceable in Florida. In fact, a few years ago in Naples, a physician who opened up a practice on Marco Island had to pay $90,000 in damages plus legal fees and was prohibited from practicing in Collier County for two years because he violated the restrictive covenant from when he was an employee of an area physician.
That is just one example.
We are also asked questions that relate to the distance and time that is considered enforceable. Essentially, the restriction on the geographic area is situational and jurisdictional – it depends on where you live and what you are restricting.
Currently in Florida, the standard is that the area has to be “reasonable.” If required, the court will disregard the restricted area set out in the contract and define what is “reasonable.” This decision is usually based on:
1. Protecting the employer, buyer or remaining partner from damage that could be caused to the practice by a violation of the restriction and;
2. Protecting the employee, seller or departing partner from undue restrictions of the practice of their chosen profession.
Generally speaking, highly populated areas will generally have covenants with shorter distances whereas sparsely populated areas will have longer distances.
An example of an enforceable restrictive area could be a five to seven mile radius from the practice location in most metropolitan or developed areas of Florida. An unreasonable restriction would be a 25 mile radius from the same practice. On the other hand, it might be reasonable to enforce a 25 mile restriction in an urban area for a dentist that draws patients from a 25 mile radius or for a practice in a more remote or rural area.
With respect to time, Florida Statute §542.335 clearly provides the following restrictive covenant provisions:
1. For Employees or Independent Contractors: A covenant of 6 months or less is presumed to be reasonable
A covenant greater than 2 years is presumed to be unreasonable
For the time period between 6 months and 2 years, the employer must show that the time restriction is necessary to protect a legitimate business interest of the practice.
2. For Sellers: A covenant of 3 years or less is presumed to be reasonable
A covenant of greater than 7 years is presumed to be unreasonable
For the time period between 3 years and 7 years, the buyer must show that the time restriction is necessary to protect a legitimate business interest of the practice.
It is also made clear in the Statute that an injunction can be obtained from the court to prohibit the continued violation of a restrictive covenant and the court shall not consider any individual economic or other hardship that might be caused to the person. The prevailing party can also be awarded attorney fees.
The bottom line: Restrictive Covenants are enforceable in Florida and can be very expensive if violated. That said, Restrictive Covenants that are unreasonable will most likely not be enforced. Having an experienced professional who works with these types of agreements on a regular basis can prove to be invaluable (possibly worth even $1.6 million) whether you are buying or selling your practice.
Lance Jacob of the Dental CPAs has compiled a list of the top ten most common tax filing mistakes that he sees his dental clients making.
1. Filling out tax forms with an incorrect Social Security number. The IRS computers will automatically reject your deductions and credits if your Social Security number is wrong. This mistake seems careless and trivial, but it is paramount to have the right Social Security number when filing your taxes. Your social security number is your tax ID number, which is linked to numerous transactions such as income statements, savings account interest, and retirement plan contributions. It is also vital to claiming tax credits.
2. Double dipping on dependents for divorced taxpayers. Ill repercussions could result such as additional taxes, penalties, and interest charged. A child can ultimately meet the rules to be a qualifying child of only one person. Once divorced, your children do not duplicate out of thin air; therefore they cannot be claimed twice in taxes. The IRS does not allow both divorced taxpayers to claim a child as a dependent.
3. Not reporting non-deductible IRA contributions. Any contribution to an IRA, whether it is deductible or non-deductible, should be reported on Form 8606, so when you withdraw it you are not taxed on it. Plain and simple, all contributions to an IRA must be reported.
4. Incorrectly reported estimated tax payments. If your accountant instructed you to make quarterly estimated tax payments, be sure to let him or her know the details of the payment for each installment. Provide the check numbers, dates of payment, and the amount of each payment. What often happens is people claim they made the payments as their accountant told them, but did not keep any records and inadvertently forgot a payment or two. If the accountant includes all of the estimated payments on the return when they all were not really made, the IRS or state government will send a notice of tax due with penalties and interest.
5. Incorrect Federal ID number used on 1099 MISC. Although your accountant can easily fix this, the less the IRS has to contact you, the better it is. The IRS matches 1099MISC and the Social Security number or Federal Identification number used. If you provide services, and the client you did the work for issues a 1099MISC, be sure they know to use the federal identification number of your business and not your social security number. If they use the wrong number the IRS will send you a notice that you did not report income on your personal return, when in fact it was reported correctly on your business return.
6. Exceeding the mortgage interest deduction limit on Mortgage and home equity debt in excess of $1.1million. This error commonly falls as the fault of both the taxpayer and accountant. They only deduct the amount reported of the mortgage interest statement, Form 1098, and do not bother to check the amount of mortgage the taxpayer has. The tax laws limit the amount of deductible interest to the interest on the first $1,000,000 of home mortgage debt and $100,000 of home equity debt . So if you have a mortgage of $2 million, you can only deduct mortgage interest related to the first $1.1 million in total debt.
7. Standard mileage vs. actual expenses. Mistakes in this area come from inconsistent use of methods. If your car is for business purposes only, then the entire cost of its operation can be deducted. However, if the car is used for both business and personal use, only the cost of its business use can be deducted. The amount of your deductible car expense can be found using either the standard mileage rate method or the actual expense method. Some people will qualify for both methods but you must choose only one method when you start using the vehicle and continue with that method until you replace the vehicle. Be sure to figure your deduction with both methods initially to see which gives you the larger of the deductions.
8. First-Time Homebuyer Credit recipients unaware of the fine print. Those who received a First-Time Homebuyers’ Credit towards their purchase of a home settled on prior to 12/31/08 must begin repaying that money on 2010 tax returns. Now is the time to take a good hard look at the details of this credit. Many who accepted the $7,500 credit may not realize that it was in fact a loan, and the government will begin not-so-politely asking for the money back over the course of the next 15 years starting with 2010 individual tax returns. As with any federal money however, there is a lot of fine print to read into on this one.
9. Forgetting to tell your tax preparer you took an early distribution on an IRA; therefore, failing to calculate the early distribution penalty of 10%. If you are under the age of 59.5, a distribution on an IRA (including employer matching and profit sharing) is considered early, and subject to a 10% additional tax. This tax is in addition of other taxes that apply to the distribution.
10. Forgetting your signature on your return! If you were an artist, you wouldn’t forget to sign your masterpiece upon its completion, would you? You must sign your taxes for the IRS to process your taxes. Filing your taxes electronically is a foolproof way to ensure your taxes will not go unsigned. These software packages do not allow documents to be sent unless every step is completed.
I borrowed X dollars to buy 100% interest in a dental practice. I'm actively involved in running the business. I contributed $0 initially. If I have a loss for the 2010 tax year, am I limited by the at-risk rules?
If you have no basis in the S-Corp you can't take losses. Since you elected to do an S-Corp instead of an LLC, did you at least get the loan in your personal name? Before you ask, a personal guaranty on a loan in a corporation name won't help either.
If the loan is NOT in your name, do you have access to any cash personally you can lend to your corporation to give you basis?
1. The loan is in my personal name. I incorporated 6 months after I purchased the practice.
I think you might be fine then based on this statement, would have to see the details of the "incorporation" in terms of the timing, tax returns, etc.
2. Duh. Can't believe I missed this one. The only cash I had was the cash I had in my sole proprietorship checking account when I incorporated. I created a new checking account when I incorporated and contributed all of the cash-on-hand to the new corporation. This would be my basis, right? What document would I need to provide/create to show this transaction?
Simply the transaction itself. What I mean is if you have a personal checking account showing a transfer of $10,000 and on the same day the corporate account shows a deposit of $10,000 and you have the deposit ticket, you'll be fine on the documentation.
Why did you decide to incorporate 6 months after you purchased the practice?
During the financing phase of the practice acquisition, the bank asked me if I was planning to incorporate prior to funding. When I said "yes," they said that funding would be delayed up to 6 weeks. Time was of the essence, so I decided to move forward as a sole proprietorship.
I waited until the end/beginning of a quarter to incorporate to make payroll taxes, etc. easier to calculate.
Thanks for the info regarding my basis.
Got it. Thanks for the reply. 6 week delay, wow! Looks like it may have worked out as it was.
BTW - not that this applies to you, but for anyone else reading this post in the same or similar situation, if you have access to a personal LOC or HELOC, that's another source of cash to get you basis.
I just formed an S -Corp from Sole P….what can I write off in taxes from one and not from another? EX: health insurances, Dis ins, MP ins. In S-cop, I am an employee now, what can I give myself in benefits (ex. health Ins, dis. ins, MP ins) and still tax write off? Do I need to provide that do all of my employees?
Generally, from an income tax perspective there's very little else an S-Corp offers that you can't get from a sole-proprietor.
Why did you form an S-Corp in the first place? What were you looking to achieve? What benefits were you looking to gain and how do they compare to the additional costs of an S-Corp?
Seems to me that if you got advice on the reasons to form an S-Corp, that advice would have considered these questions AND the ones you're asking.
Let’s say I show 50K in profits after everything has been paid in full, including any taxes on previous distributions.
If you're referring to income taxes they are not a deduction from the practice.
Let’s say I purchase a new op before year’s end.
Chair, light, cabinets, computers, isolight and it cost 25K. Can I then depreciate the 25K I spent on the op this year at 100%?
So now I have 25K of profits left.
That would leave me with a profit of 0K on paper.
Only if you deduct it twice, which you can't.
Then I could write myself a distribution of that left over 25K without paying one cent to taxes?
Nope, you'll owe tax on $25k plus any profit you used to pay prior year income taxes.
Another question: we are looking to hire another employee. I read/watched on TV…there will be a 6 month payroll tax holiday on new hires. Is this true? Do I have to wait until Jan. 2011 to hire or can I hire now in December?
I don't think anything has been passed yet. If you need an employee then hire them. It’s that simple