2015 Tax Extenders Passed!

On December 18th, Congress and the President signed into law the “Consolidated Appropriations Act, 2016” and “Protecting Americans from Tax Hikes (PATH) Act of 2015”, both of which provide a number of significant tax changes. The Protecting Americans from Tax Hikes Act will grow our economy and help American taxpayers keep more of their hard-earned dollars. This Act extends a number of important tax breaks and makes many of them permanent.

Keys Facts You Should Know 

According to Accounting today, here are some of the over 20 permanent provisions:

• Increased expensing limitations and treatment of certain real property as Section 179 property;
• The exclusion of 100% of gain on certain small business stock;
• Reduction in S corporation recognition period for built-in gains tax;
• The enhanced Child Tax Credit;
• The enhanced American Opportunity Tax Credit;
• The enhanced Earned Income Tax Credit;
• The deduction for certain expenses of elementary and secondary school teachers;
• The deduction of state and local general sales taxes;
• Basis adjustment to stock of S corporations making charitable contributions of property.

For the full list of permanent tax provisions, click here. 

Provisions extended and modified through 2019

• Bonus depreciation (50% for 2015-17, 40% in 2018, 30% in 2019);
• Delay on high-cost heath insurance plans (so-called “Cadillac” tax) from 2018 to 2020;
• The New Markets Tax Credit  providing $3.5-billion allocation each year through 2019, the carryover period for the credit has also been extended to 2024;
• The Work Opportunity Tax Credit modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40 percent of the first $6,000 of wages.

Provisions revived and extended through 2016

• Modification of the exclusion of mortgage debt discharge;
• Mortgage insurance premiums treated as qualified residence interest;
• The above-the-line deduction for qualified tuition and related expenses;
• Over a dozen incentives for energy production and conservation.

For more information on these tax provisions and how they may impact your business or personal tax situation, please contact your Dental CPA tax representative directly.  You can also contact our office at 410-453-5500, and one of our staff members will be happy to assist you.

Why You Need Certain Information for Your Due Diligence – Part II

I decided to write this blog series mainly because of the pushback we get from sellers’ advisors on some of the information we request when representing the buyer. The second items I’ll discuss are the practice management reports for production by provider by ADA code and production by payor.

What’s interesting about the pushback we get on these reports is that we want these reports when we’re representing the seller and assisting them in coming up with an asking price or a value for their practice. We believe we can do a more thorough job for the buyer if we have this information.

Of course, we’ll get the standard response of “it’s in the information we already sent to you. Unfortunately, that’s not correct. Many times what they’ve provided is a summary of the production by category like diagnostic, preventive, restorative, etc. and it’s usually for the entire practice, not by provider. While this might be good information for practice management consultants to get an overview of the practice for their consulting engagements, it’s never enough information for a buyer who needs to understand how the collections are being generated and who’s generating them. We may also get a fee schedule and/or a practice production by ADA code. Again, good information, we just need more.

You see, the buyer is in a different position than the seller. The seller knows what they do; they know what their hygienists do, but guess what, the buyer has no idea. The seller could be performing procedures that the buyer doesn’t perform which could mean the buyer can’t replicate the seller’s collections. Or, maybe the buyer does procedures that the seller doesn’t so there may be some upside potential for the buyer. You can’t determine that without seeing the procedures, ADA code no matter what the practice questionnaire might state.

The other problem we often see is that many practices put the doctors’ exams under hygiene production. So we’re told the hygiene production makes up 40% of the total revenue of the practice when it’s more like 25%, which is closer to normal. Without seeing the detail and taking the seller’s word, the buyer might draw an incorrect conclusion that there’s a lot more dentistry to be done.

The two other aspects of knowing the true production by provider is A) we can evaluate the hygiene production to their wages to see if it falls within industry norms and B) we can better assess “reasonable” compensation for a dentist when performing our price assessment. We see valuation reports that have used incorrect assumptions based on bad PM reporting where practice prices have been overstated because “reasonable” doctor’s compensation has been understated based on dentistry of only 60% of total practice revenue instead of 75%.

The other PM report we ask for, production by payor, shows the total number of PPOs in the patient base. This also becomes important when trying to assess the collections generated by PPOs in which the seller is IN network with and the percentage of patients in PPOs where the seller is OUT of network.

Many of you already know about the Delta Premier issue, where buyers may not be able to retain the Delta Premier fee schedule w/o also participating with the regular PPO and therefore, a buyer won’t be able to replicate the seller’s collections in many cases. However, what many buyers of FFS practices fail to understand is the percentage of patients in a FFS practice that belong to PPOs. The buyer runs the risk of having those patients leave the practice to look for an IN network provider when the seller leaves the practice. The attrition rate is generally known to be higher in a FFS practice for a buyer anyway; if the buyer also knows that 40% of the patients have a PPO, then they need to appreciate that the risk of attrition could be worse.

This report will also be helpful to a buyer who is buying a FFS practice with the intent of potentially joining PPOs in the future, or a buyer of a PPO/FFS mix practice who has the intent of potentially dropping out of some PPOs in the future. It’s very useful information for the buyer and, unfortunately, we get pushback from sellers and their advisors when asking for these reports.

So here are some real life examples of why these reports can be very enlightening for a buyer:

1. I’m in the middle of an assessment right now on an FFS practice where the top ten PPO payors represent about 35% of the practices total production. For the buyer, if they remain FFS, they run the risk of higher than normal attrition as patients may take the opportunity to go to an IN network provider. The buyer is also contemplating joining some PPOs as the practice revenue isn’t very high so they now know what the potential impact could be to the existing patient base and revenue by getting into certain PPOs.
2. As mentioned above, we’ve seen valuation reports calculating reasonable doctor’s compensation for dentistry using a lower doctor collection figure because the doctor’s exams were under the hygiene production column. This has the effect of creating a higher value than would otherwise have created with proper information.
3. We’ve seen other dentistry codes thrown under the hygiene column like crowns, extractions, etc., almost always by mistake. However, with production by provider by ADA code reports we can make the proper adjustments and provide a more accurate picture of practice price and performance for the buyer.
4. We’ve seen situations where practices were labeled FFS when in fact they were a mix FFS/PPO practice and the PPO portion was significant enough that the buyer chose to walk away. We determined this when comparing collections to gross productions were less than 85% of gross production. In FFS practices, collections are generally greater than 90% of gross production.
5. Lastly, we’ve seen production by provider reports that show other doctor providers in the past, like specialists where their revenue wasn’t removed from prior year collections even though their compensation was removed. Needless to say, prior year collections were overstated so that the asking price was way overstated. We would have NEVER known this if we only relied on a tax return and/or P&L collections.

The fact is most practices have the PM software that can generate these reports easily, even if the office has to contact the software company to find out how to generate these reports. There isn’t any reason why sellers and their advisors can’t provide these reports and in our opinion, there isn’t any reason every buyer shouldn’t be asking for these reports.

Written by Tim Lott, CPA, CVA. For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA or emailing info@dentalcpas.com.

Why You Need Certain Information for Your Due Diligence – Part I

I decided to write this blog series mainly because of the pushback we get from sellers advisors on some of the information we ask for when representing the buyer. The first item I’ll discuss are W-2s by year along with an employee roster for that year noting positions, average hours worked per week, hourly rate and any other benefits received.

Naturally one of the first responses we get is “why do you need to see the W-2s, all that information is either on the tax return or in the practice profile under the staffing section”.

Unfortunately, while the advisors mean well, they’re incorrect. The tax returns don’t list each employee, their wages, the department they work in, the hours they work, their hourly rate or the benefits like paid vacation and sick time. The tax return does show total wages; maybe an expense category called employee benefits and/or group insurance, however, it won’t tell you how much is for the staff and how much for the owner.

The practice profile may list this info in more detail, usually ONLY for the current year though and we all know employees come and go and sometimes the practice changes on the number of staff, etc.

Another reason we want to see the details is to help the buyer assess the performance of the practice. We want to be able to tell the buyer what percentage of revenue is assistant wages, hygiene wages, front desk wages and admin wages. We also want to be able to verify any adjustments the seller’s advisors made to wages for owner family members who may get paid, but their compensation may not be market value. While we’d like to accept their adjustments as accurate, you’ll see below it’s not always the case.

So here’s a list of real life experiences we’ve encountered by having the W-2 and employee roster information:

1. I’m in the middle of an assessment right now where the owners’ wages per the tax return were shown as $210,000 while the W-2 showed $260,000. Why the difference? The owner took a $50,000 bonus in December and when the internal p&ls were prepared they were coded to office wages (front desk/admin) and the tax preparer used the p&ls to prepare the tax returns. Needless to say, after normalization adjustments to overhead it was still overstated by $50,000.
   
2. We’ve seen on numerous occasions where the seller’s advisors who prepared the work to establish an asking price made reductions to overhead for family wages based upon what the seller told them about how much their family was getting paid. Unfortunately, that information was for the current year and not necessarily the same for the prior years, and the advisor assumed the same reduction in prior years for the family wages. In one case, the reduction was $35,000 for three family members where the owner JUST put them on payroll for the first time. So the $35,000 reduction in prior years was incorrect.
   
3. We had a case where the advisor reduced owners wages to normalize overhead by the tax return wages noted on line one for “officers” which most of the time is JUST the owner. They also reduced the staff wages by the spouses’ wages of $75,000. That would have been fine EXCEPT the owners wages were $75,000 lower than what was stated on the tax return because the tax preparer added the spouse wages to that line since she was listed as an officer. So they reduced overhead by the spouses’ wages TWICE.
   
4. We’ve seen on numerous occasions where potential buyers will back off their pursuit of a practice because the total wages are very high as a percentage of revenue compared to the norm. However, when we break it down by department and realize the hygienist and front desk wages as a percent of revenue is fine and it’s the assistant wages that are out of whack, the potential buyer reconsiders because they know they can likely improve upon that issue fairly easily.
   
5. We’ve seen advisor worksheets that reduce overhead by the amount the associate was paid in wages for all years, again, based on current year information. However, when we get the W-2s for prior years, we see that the reduction for prior years isn’t accurate. The advisor simply assumed the associate made about the same.
   
6. And lastly, my personal favorite…..we’re assessing a practice and when we ask for the W-2s we get a LOT of pushback….the seller and their advisors kept insisting we didn’t need them, the wages on the tax return were accurate and they could give us the breakdown by department. We insisted and the buyer was willing to walk away if we didn’t get this info. When they finally decide to give us the info they then proceed to tell us the W-2 totals will be greater than the tax returns because the doctor also works as an IC about 30 minutes away and receives 1099 income personally and they allocate the wages between the practice tax return and his IC income. Hmmm, ok, well let’s see the sellers’ personal return where this activity is being reported so we can review that and verify the allocation seems reasonable. Well, they resisted that of course & finally told the buyer they were no longer interested in selling the practice. Here’s the kicker, just about every overhead expense was on the low end of the normal range if not below the normal range and we suspect they were paying quite a bit of the practice overhead FROM the IC bank account (the personal bank account) and, therefore, making the profit look much more profitable then it appeared.
   

The fact is in the vast majority of the assessments we do the wages reconcile with the tax return and the adjustments made by the sellers advisors are accurate. Still, by having this info we’re able to provide so much more info to the prospective buyer about the wages statistics on the practice that goes beyond the price.

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

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA  or emailing info@dentalcpas.com