Is Electing an S-Corp Status the Best Option for this Dental Group?

I have a hypothetic tax question. Of course I am reviewing this with both the accountant and financial planner, but curious of your opinion.

Assume there is a group practice with multiple owners that make more than 250,000 net (let’s say 500,000 average for argument sake, but they truly are not equal, one might be 375,000, one might be 600,000, etc).

They currently operate under an LLC as the practice operating entity. 

…and I assume that LLC is currently being taxed as a partnership, correct?

They are thinking of electing S-Corp status through their LLC to avoid some of the pending tax increases.

As an S-Corp, how will this effect
1) their ability to unequally distribute compensation

It will add a couple of steps to the year-end planning process as well as the following years tax return prep, though it won't be a big deal. Basically you'll want the wages to be set at the lowest base salary for everyone. Then, when you calculate who is due what, you'll use the wages to "reconcile" the compensation differences. For example:

Let’s assume everyone takes a salary of $250k. At the end of the year, it's determined that one should make $375k. One should make $500k and the other $600k. That means that one gets $125k more, another gets $250k more and the last gets $300k more.

The last one gets a W-2 bonus of $175k ($300k-$125k), the second one gets a W-2 bonus of $125k ($250k-$125k) and the first one gets NO W-2 bonus. That leaves $375k of S-Corp profit split evenly at $125k each so everyone got what they were entitled.

The trick is this will have to be estimated in December then reconciled to actual for the year when all the numbers are final for tax return purposes. These reconciliation differences will also run through wages.

2) the ability for a partial sale of personal goodwill should a transition occur

Bingo. This is where the S-Corp complicates transitions and you might want to weigh this issue with existing income tax issues.

In my opinion the parent LLC taxed as a partnership provides the most flexibility when it comes to future transitions in and\or out.

There are a couple of potential options, each with pros\cons:

A. consider the S-Corps at the partner level instead of the parent LLC level

B. consider creating another entity, S-Corp, as a management or dental provider company with the 3 owners so that it won't own any of the tangible assets or personal GW, it just provides the dental services. The LLC pays that company for its dental clinical services to the extent of the LLC profits, the S-Corp then pays its doctor providers based on their clinical efforts accordingly.

I haven't thought this completely through; however, that MIGHT allow you to minimize your current taxes while maintaining the ease of future transitions.

This model is used quite frequently with certain corporate buyers. They own the "parent" company while the doctors have their own clinical corps. The parent company pays the doctors clinical corporation for services.

Good luck

This first appeared on Dentaltown.

For more information, please contact info@dentalcpas.com

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Should Dentist Move Office, and if so, How?

I am a general dentist in private practice in a rural area wondering about how to relocate to a larger nearby town.  My practice has slowed down over the last few years as the town is getting smaller and smaller.  

I was wondering if you had any suggestions as to a good approach moving locations while trying to retain as many of my current patients as possible.  The new town would be about 20 miles away.  I was thinking about trying to lease some space in a specialist office maybe 1/2 to 1 day per week while keeping my rural practice open full time.  At some point I would then relocate my practice to the new town.  I know there are a lot of variables in this scenario but I was just curious as to whether this  has done before and any thoughts or suggestions?

Currently we are not in dire straits but production has decreased an average of 6%/yr for the past 4yrs.  The town itself is losing businesses and population.  I'm just trying to get out in front of what may be coming.  I recently started direct mail for this town and other towns surrounding us which hasn't done well but I just started.  I am tapped out on cutting costs so moving to a nearby town that is in fact growing looked like a possible option if you had great suggestions on how to go about it.

  

Thanks for your response.

I would think this is the only way to try it. That is, open up in the town you want to build in and slowly wean your patients from the old location to the new. You might work your existing practice for 4 days for the 1st 12 months, then 3, then 2, then 1, etc. While weaning away from the old location, slowly increase the days in the new location 1,2,3,4, etc.

So I see it as maybe a 3-5 year type of transition to see how many of your existing patients are willing to come see you in the new location. Over time, those that have agreed to do so should remain with you after closing the old location.

If you can run your new location inexpensively the first year or three, that'll help significantly with the double fixed OH.

Good luck.

This first appeared on Dentaltown.

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How Should Dental Supplies be Coded in QuickBooks?

So over the last 3 months, as we've had to purchase a lot more surgical instruments, cassettes, etc. to be set up for more implant-related surgeries (hard/soft-tissue grafting, extractions, all that stuff), we've been listing all the purchases in QuickBooks as Dental Supplies, rather than Equipment (Durable Goods).  This month alone that's added about $2600, which makes our Supply bill, as a percentage of expenses, look REALLY out-of-whack.

Is this the best way to do it, knowing that the costs will just disappear in another month or so (we split them up over 3 months for cash flow purposes), or is it OK to list them as Equipment, since they'll last for many, many years.

If your locality has personal property taxes just be sure to note when you've disposed of the instruments so you're not paying property taxes on them long after they're gone.

This first appeared on Dentaltown.

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Leveraging the Equity in a Dental Practice.

This is a guest post from Stephen Trutter at Bank of America Practice Solutions. 

Have you ever wondered what the value of your practice is?  Are you at a point in your practice where you want to expand, renovate, or even relocate your office?  Do you have debt that you would like to refinance in order to free up more cash? These are all questions that I am being asked from dentists on a consistent basis.  I wrote this to provide some answers. 

The equity in your practice is the buying power of your practice.  It gives you the ability to market, expand, and ultimately when you retire, sell your practice for top dollar.   So before you can determine what you would like to do with that equity (which you may have built over the years), let’s just get an understanding of what equity is. Equity is the residual claim (or interest) of the most junior class of investors in assets - after all liabilities are paid. In the dental world, it is typically (last year’s revenues x 75%) less your current practice debt. 

The best place you can invest your equity is in your practice.  Today’s young dentists are trained on the latest technology and today’s dental consumer wants their dentist to be utilizing the best technology as well.  This gives them comfort and it can get you more patients. Along with updating your office with this equity, you can market your practice more effectively, rejuvenate your practice (dental practice makeover), expand with additional space, or take advantage of historically low interest rates and consolidate debt. 

The question that comes up is whether or not it is a good time to spend money.  The current economy is rocky, however, the dental economy is still strong.   Interest rates are at all time lows so it is possible to take advantage of this to borrow to improve your practice.  Landlords are generally giving generous improvement allowances.  Equipment vendors have incentives to take advantage of. Talk with your dental CPA, accountant or tax advisor, there may be significant tax advantages of upgrading now versus later. 

To recap, your practice is the main investment you can control.  No stock, bond, etc… can give you the same return as your practice.  Take advantage of the current economic conditions to improve your practice, consolidate debt, and/or expand.  The funds you spend today may give you huge returns in the future.  

For more information, please contact info@dentalcpas.com

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W-2 or IC for this Orthodontist?

Hello,

I was initially offered a full time job at this big office as an employee orthodontist. Paid on collection. However I was told by my financial advisor to ask to independent contractor and even though they did not prefer that but they did offer higher % on collection and I will be responsible for ALL consumable supply.

My question is: should I accept the job as an employee or independent contractor in this case?

It really depends on you and your particular situation - maybe yes, maybe no.

What are the benefits as an IC for me over employee options?

Should I form a S-Corp?

Since your "financial advisor" advised you to ask to be an IC, didn't they go over these issues with you? What were their reasons for advising you to be an IC and what did they say you stood to gain by doing so and what were the disadvantages? Hopefully they covered all of these issues with you as part of their advice. They know more about you and the situation than we do and are in a better position to answer these questions.

Thank you very much. 

Didn’t the advice come with some sort of analysis showing you why the suggestion of being an IC would be more beneficial than employee?

This first appeared on Dentaltown.

For more information, please contact info@dentalcpas.com

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