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Don’t Be So Quick to Turn Your Head on High Overhead

So you’re in the market looking to buy a dental practice, and you’ve seen information from brokers with summary practice information.

As you’re looking at the overhead information, you think that some of the OH stats look really low and that must be great, and some look really high, and that must be terrible, so you quickly disregard the high OH practices and move on.  Well, I’m here to tell you that sometimes the opposite is true.

The ones that appear to have low overhead may not have low overhead at all, or there’s a not so good reason the overhead is low….that’s going to have to wait for another blog. This blog is about the practice with what appears to be high overhead, which you think is bad.

Like ANY practice purchase transaction, a buyer MUST do their due diligence, and I’m here to tell you that sometimes high overhead can be a good thing.

First, higher overhead while generally not a good thing will usually generate a lower asking price. Higher overhead means lower profits; lower profits usually mean lower values. So from a buyer’s perspective, a lower price can be a good thing in terms of price.

Second, once you dive into the overhead and find out WHY it’s so high, you might learn a little more about the practice and how the owner is actually running the practice. Maybe they’re being lazy and not shopping around for the lowest cost of supplies or worse; maybe they’re letting a staff member handle all the supply ordering without any controls. Maybe they’re using the most expensive labs out there. Maybe they’ve cut back to working three days a week which can make some of the fixed expenses seem high like rent, utilities, insurances, etc. and maybe they’re still paying staff for four days per week.

Third, maybe they’re a fairly aggressive taxpayer and like to try and deduct as much as they can thru the various expense categories. Sometimes this is the hardest area to verify and confirm, other times this can be detected and verified. This is when we get to advise the buyer that the overhead will be lower under their watch.

Fourth, one common aspect of high total overhead is high labor costs. As noted above, maybe it’s because the staff is getting paid for more hours than they’re working. That can be an easy fix, just add another day of production to match the hours they’re getting paid for…assuming the patients are there to allow this. Maybe the owner has been very generous and the staff is paid at the top of the market or even above the market for the area, or the owner is paying 100% of their health insurance premium and some pension contributions. This is a little more difficult to address and will usually require a buyer to “ease” into proper compensation and benefits. Sometimes it fixes itself when the employees leave, and the buyer can replace with market rate pay.

Lastly, and the main reason for this blog, is maybe it’s because the hygienist comp is running 15% of revenue when it usually runs around 8-10%. Unfortunately, some buyers and their advisors won’t even look this deep to know exactly where the issue is. This is one reason we want to see the W-2s for each year and break them down into their departments. Many times, if hygiene wages are high it usually means the practice is generating a lot of hygiene production and you’ll be able to see this when you breakdown the production by provider. You may see hygiene production at 40% of total production when it usually runs around 25%. When you see it at 40% or more, you’ll almost always see hygiene wages greater than 10%, and that drives up the overhead percentage. It also usually means many of the other categories will be higher than the normal ranges as a percentage of revenue because there’s not enough dentistry. This isn’t always the case; however, we see it quite a bit with high overhead, high labor practice stats.

The lesson to learn here is DON’T automatically run away from a practice that appears to have high overhead. Look at some of the other stats first like the breakdown of production by provider, the specific department wage percentages to revenue and look at the schedule to see how many hygiene hours they have per week compared to dentistry hours. This information alone may provide the insight you need to pursue the opportunity and do a little more digging to see what the real deal is.

Sometimes these high overhead practices are the goldmines you often read or hear about. Good luck and happy practice hunting!

About Tim Lott

Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at tlott@dentalcpas.com or any of the other dental partners/principals at (800) 772-1065 or info@dentalcpas.com. For more blogs, visit our Dental CPAS blog page.  

Forgotten Tax Deductions

It’s estimated that most dental practices overpay their taxes. We don’t want yours to be one of them!

There are several deductions where your dental practice could be saving money on taxes, even on everyday expenses. Two words to keep in mind when claiming dental tax deductions: ordinary and necessary. Both conditions must apply for the expense to be tax deductible.

Read below for eight dental tax deductions to keep more money in your practice. 

Some tax deductions you’re probably already aware of, like premiums for malpractice insurance or the 50 percent deduction for meals and entertainment.

 Talk to your tax advisor to see what applies in your situation.

Supplies

Everything from toothbrushes to cotton balls to dental eyewear can and should be tracked – and deducted. This includes office stationery and administrative supplies.

Lab Fees

Lab fees can be 10 percent or more of your practice’s budget, so make them count on your taxes. Think x-rays, crowns, partials, molds, and dentures. Keep track of these fees for tax savings.

Continuing Education

Even if you don’t consider yourself a lifelong learner, your office’s yearly subscription to a dental industry magazine could be tax deductible. So could your costs and fees associated with exams, licensing, conferences, and certifications. Go ahead and pursue that specialty!

Vehicles

There are three ways to deduct vehicle expenses: 1) buy the vehicle through your dental practice (if your business structure is a corporation), and include personal vehicle expenses as income on your individual tax return 2) track mileage expenses or 3) track actual expenses.

Number one is complicated and merits a call to your tax advisor. The current mileage rate is 53.5 cents per mile for 2017 (54 cents per mile for 2016). Or, to track actual expenses, keep a log of oil changes, repairs and maintenance, gas, and so on. Note that ordinary trips to and from your office don’t apply for standard mileage rates, but trips to other offices or business meetings do.

Utilities

Keep a record of your dental practice’s water, electric, gas, phone, internet, rent and/or mortgage payments.

Employee salaries, healthcare, and retirement accounts

You probably already know you can deduct the employer’s contributions to retirement and healthcare accounts. But you might not be aware of the recent change allowing employer-funded health savings accounts, or that your spouse can earn a salary that can also save money on taxes (there are many ways to do this; call our office for more information).

Read our blog post on Tax Savings for Dentists for more information.

Advertising and marketing

The cost of promoting your dental practice is tax deductible. So take out that ad in the local business journal, and send those mailers. Then include the fees on your taxes.

Legal and Tax Fees

Finally, you can deduct the cost of your attorney and tax professional. We can show you how – contact us today!

Tech Practice Investments

The modern dental practice is an efficient, patient-centered experience that seamlessly integrates technology into everyday processes and procedures. Does this sound like your dental office? Even if you answered yes, read on for suggestions on the best technology to invest in for a more productive, profitable dental practice – and how to make your equipment wish list a reality with bonus depreciation.

CAD/CAM Technology

If your dental practice doesn’t yet have a CAD/CAM system, now is the time to consider it. CAD/CAM, or computer-aided design and computer aided manufacturing, is a digital process that improves the design and creation of crowns, dental implants, dentures, and more. Since these systems can cost upwards of $100,000, it’s an investment that requires significant thought and careful planning.

3D Printing

Going hand in hand with CAD/CAM systems, 3D printing will allow you to produce your own custom orthodontics, implants, and restorations in the office. There are printers specific to orthodontics, general dentistry, and dental surgery, each with their own specifications. The cost of 3D printers varies and will generally be less than $5,000.

Practice Management Software

There are many options for practice management software. The best software solutions will mirror your workflow and automate key processes. Costs vary from a few hundred dollars for the set-up of a cloud-based software program for a small office to $15,000 and above for locally hosted software programs and/or larger offices.

Keep In Mind: Certain types of software may not be eligible for depreciation. Contact our office for details.

Purchasing one 3D printer should be fairly easy for most practices. After all, most corporate credit cards or lines of credit have a limit higher than $5,000. What if you’re looking at purchasing more than one 3D printer, investing in a custom software package, or buying a CAD/CAM system? Assuming you don’t have a large cash reserve or high credit line, what are your options for adding this technology to your dental practice?
The solution is bonus depreciation.  2017 is the last year for 50 percent bonus depreciation; the value decreases in 2018. As of now, bonus depreciation is set to expire in 2019.

What Is Bonus Depreciation?

When you make capital upgrades to equipment or property, you can recover the cost of those upgrades through an annual tax deduction called depreciation. Most tangible property can be included, such as office furniture, computers, vehicles, and – you guessed it – CAD/CAM systems, 3D printers, and computer software.

What’s Not Included

Although you can include many capital improvements in bonus depreciation, you cannot include the following:

• Land
• Property with a useful life of less than one year
• Property that is disposed of the same year you purchased it
• Personal property

How It Works

Typically, the cost of a capital upgrade is depreciated over the course of its useful life – generally, five years or more. But for equipment or property placed into service in 2016 and 2017, bonus depreciation allows for an immediate 50 percent deduction the first year. In 2018 and 2019, the benefit decreases to 40 percent, and – as of now – bonus depreciation will expire after 2019.

Depreciation allows you to recover the cost of normal wear and tear over the life of, say, your office’s dental chairs. An oversimplified example is if you purchased three new dental chairs in 2016 for $3,000 each. Instead of spreading that cost over seven years, if you bought the new chairs in 2016, you could deduct 50 percent of the basis – the amount you paid for the chairs – the year you placed the chairs into service, which was 2016. If you bought the chairs in 2016 but didn’t install them until 2017, then the useful life begins in 2017, the year you placed the chairs into service.

The benefit is that you get more money back quicker. See our example below.

Calculating Depreciation

To calculate depreciation, you’ll need the total amount you paid, the year the equipment was placed into service, and the equipment’s salvage value – how much it’ll be worth at the end of its useful life. Subtract the salvage value from the total amount paid. This is the amount you can depreciate over the equipment’s useful life.

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Example:
You purchase a new CAD/CAM system in 2016 for $100,000 and it has a useful life of seven years. You determine its salvage value to be $20,000. The difference is $80,000. You can deduct $80,000 in depreciation over seven years.

Purchase Price: $100,000

Useful Life: 7 years

Salvage Value: $20,000

100,000 – 20,000 = 80,000

80,000 / 7 years = $11,428 yearly depreciation deduction

Each year for seven years, you could deduct more than $11,000. But if you use bonus depreciation, you could deduct $40,000 in Year 1 and about $6,600 for each of the remaining six years.

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Depreciation terms vary based on the equipment. Note that while you can depreciate the cost of improvements to land, you cannot depreciate land itself. Calculating depreciation is more complex than the simplistic example we provided above. You should consult with a tax professional to review your specific situation.

Next Steps

If you’ve been thinking about making technology or other upgrades to your dental office, 2017 is the last year to take advantage of 50 percent bonus depreciation. Consider your goals for your practice and how you want to improve the patient experience. Then, contact us to go over your options. We can assess the tax implications of any new office upgrade and help you get the most out of your investment.

Tax Savings for Dentists

Could you be paying too much in taxes for your dental practice? Below are five areas where you may be overspending.

Deducting Business Expenses

Other than the typical business expenses you’re probably aware of, like meals and entertainment and mileage, there are other deductible business expenses that could save you more on taxes. These include business insurance premiums, retirement plans, employee pay, medical benefits, rent, tax preparation services, and more. The key is if the business expense is ordinary and necessary.

Entity Type

Your dental practice’s business structure can also be a source of tax savings. For example, if you’re structured as a Limited Liability Corporation (LLC) or Sole Proprietorship, you’re paying the full amount of self-employment taxes, which are about 15 percent. If your practice is an S-Corporation, on the other hand, you only pay the employer’s share of self-employment taxes, or about 7.5 percent.

There are other savings in business structure, too. You could consider more than one entity type. For example, patient and insurance receivables go through an S-Corporation, which saves money on self-employment taxes. You also avoid the double taxation characteristic of a C-Corporation. Your secondary entity, a C-Corporation, is used for management and administrative expenses. Or, you can elect to have your LLC taxed as an S-Corporation, whereby only the owner’s salary is subject to full self-employment taxes.

Income shifting can be a complicated but very effective tax savings strategy.

Employee Benefits

Offering employee benefits is a win-win: you create a more engaged, productive work environment and you can typically write off the costs. A sample of employee benefits you can deduct is below.

• Medical
• Retirement
• Fringe Benefits, including:
  • Transportation costs
  • Insurance (disability, life, etc)
  • Dependent care
  • Education reimbursement

There is added value with employee benefits, since they’re not counted as taxable income (unless your staff pays a portion of fringe benefits).

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Check out these 20 U.S. companies with the best employee benefits.

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Medical Benefits

Because this can be such an overlooked area of tax savings, medical benefits merits its own section.

In general, you can write off the costs of the following payments on your dental practice’s taxes:

• Group health insurance premiums
• Health savings accounts (HSAs)
• Health reimbursement arrangements (HRAs)

An HRA option for smaller dental practices that do not offer group medical insurance is a Medical Expense Reimbursement Plan (MERP). MERPs allow you to cover a portion of your staff’s medical costs, including copayments, deductibles, and qualified medical expenses. In doing so, you can write off those medical expenses. MERPs can be useful for dental practices structured as sole proprietors or LLCs with less than 50 full-time and full-time equivalent employees. Although MERPs previously did not conform to ACA standards, updated regulations permitting MERPs took effect after December 31, 2016.

Note: if your dental practice is a sole proprietorship, maximizing medical benefits will be more difficult.

Year-End Tax Planning and Projections

There are few better ways to manage your tax burden than planning ahead. If you schedule a year-end planning session with your CPA, you can look at paying certain known expenses in December or making a charitable donation before year-end, both of which result in tax deductions. You will also get an idea of your income in the next year, and plan quarterly estimated payments. This saves money because if you underpay your taxes, you’ll incur a penalty come Tax Day.

We’re here to help manage your taxes. With tax season nearly over, now is a great time to plan for the rest of 2017. Contact our office to schedule an appointment.

Making the Most Out Of Financial Planning

Did you resolve to make better financial decisions for your dental practice this year?

Financial improvements are the third most popular resolution people make on January 1. It’s not too late to make progress for 2017. Use this guide as a starting point to set up your office for success.

Tips for Financial Success from the ADA

According to the American Dental Association (ADA), smart financial planning for dentists begins with a profitable practice. A profitable practice begins with raising fees. A good rule of thumb is to implement a small increase every ten months; that way, you’re netting one extra increase over a five-year period.

Next, on the ADA’s list of recommendations is collecting 100 percent net. Make sure you see all the gains from your work. Setting your expectations lower can impact your profitability and your staff’s collection procedures. So if your monthly gross is $50,000 and after insurance adjustments and other write-offs, the net is $45,000, make $45,000 your collection goal. Don’t settle for less.

The third tip for financial success is having a plan for consistent growth. Involve your staff in this discussion, and benchmark at least the following figures:

• Gross Production
• Net Production
• Collections
• Net Collections
• New Patients

In 2015, the median gross billing for dentist owners in private practice, including specialists, was $640,000. The top source of gross billings in 2015 was private insurance, followed by direct patient payments, managed care, and government programs.

Other Recommendations

Other recommendations include viewing overhead expenses in terms of revenue, doing everything possible to ensure quality patient care, and properly managing debt.

Don’t be so quick to cut expenses if doing so would negatively impact practice growth. For example, investing in a new patient billing system requires up-front expenses, staff training, and perhaps ongoing maintenance expenses. If the new billing system allows you to serve patients better and more efficiently, it’s a win in the long run.

When it comes to debt, debt that will increase your practice’s profitability and efficiency is good. Think mortgage, software, and better equipment. But any debt you struggle to pay off is problematic.

Practice growth planning is time-consuming and sometimes difficult. But it’s time well spent. Don’t put off your financial planning goals. Put a plan in place now and see the benefits throughout 2017 and beyond.

Contact us today to make the most of the financial planning at your dental practice.

At a Glance: Important Tax Deadlines for March and April

According to a recent study on dental practice seasonality trends, March and April are among the busiest months of the year. Does this sound like your dental practice?

If so, you’ve no doubt also noticed this coincides with tax season. To help make your busiest months a little easier, here are the tax deadlines for March and April.

March 15

Dental Partnerships should File a 2016 tax return (Form 1065). Provide each partner in your dental practice with a copy of Schedule K-1 of Form 1065, or a substitute Schedule K-1. To request an automatic 6-month extension to file the return and provide Schedules K-1, use Form 7004 to extend your filing deadline to September 15.

Large Dental Partnerships (100+ partners) should file a 2016 tax return (Form 1065-B). Provide each partner in your dental practice with a copy of Schedule K-1 of Form 1065-B, or a substitute of Schedule K-1. This due date applies even if you request an extension of time to file Form 1065-B by filing Form 7004. To request an automatic 6-month extension and move your filing deadline to September 15, use Form 7004.

If your dental practice is structured as an S-Corporation, file a 2016 income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1  of Form 1120S, or a substitute of Schedule K-1. To get an automatic 6-month extension of time to file, use Form 7004 and pay what you estimate you owe on your return.

If your dental practice is electing S corporation treatment beginning with calendar year 2017, you should file Form 2553 (Election by a Small Business Corporation). If you file Form 2553 late, S corporation treatment of your dental practice will begin with calendar year 2018.

March 31

File the following forms with the IRS if they apply to your dental practice. Note that a deadline of March 31 for these forms only applies if you’re filing online.

• Form 1098 (Mortgage Interest Statement)
• Form 1099 (Self-Employment Income)
• Form 3921 (Exercise of an Incentive Stock Option), and
• Form 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan)

April 18

Dental Corporations should file a 2016 income tax return (Form 1120) and pay any tax due. To request an automatic 6-month extension of time to file, use Form 7004 and pay what you estimate you owe on your return.

You should also deposit the first installment payment for your 2017 estimated income tax.
If you’re not already working with Dental CPAs for your practice’s tax planning, contact us today. We can help manage your tax liability and reduce your stress during your busiest months.

For more information, contact out DentalCPA team at 844-DENT CPA (336-8272) or email info@dentalcpas.com 

Are You Ready For Tax Season?

If you haven’t already, it’s time to skim through your tax documents to ensure you are well prepared for filing. Here are some important items to remember:

1. Check your records for invoices of single item purchases of more than $2500. These fixed assets need to be capitalized. Review your invoices to make sure nothing is coded as an asset that should be an expense or the other way around.
2. Gather all your year-end loan, bank, and credit card statements so you can tie down balances as of 12/31.
3. Review receipts of meals and entertainment to see if anything should be coded to employee expenses. Often, there’s a good number of items that are really lunch for the employees which have a great tax benefit.
4. Review your records of gifts distributed in 2016. Gifts that were either for marketing or employee purposes should be correctly coded for them to potentially be considered a deductible expense.
5. If you participate in an employer match program, ensure that all payments are made before you file your return.

For more information or answers to questions specific to your practice's situation, call our office at 844-DENT CPA(336-8272).

Tips for Entering Your First Practice

You are out of school, and it’s time to begin your dental career. Where will you start? Have you found a place to work? As multiple questions run through your head, let’s discuss some tips that will help you navigate through the “what’s next” phase so you can start in the right direction.

Gain Experience

Working for an existing practice will help you gain the experience you need to develop your skill sets as well as well help to build relationships with patients without the concerns or challenges of a business owner.

Do Your Research

When researching the best place to practice your associateship, it’s important that you take your time so you can find a practice that is a good fit.  Don’t rush into an agreement if there are any uncertainties. Here are a few examples (not comprehensive) of what you should be discussing during the interview process:

• Clearly communicate your income goals
• If you’re interested in purchasing the practice down the line, share your intentions
• Be honest about your skill sets and comfort level
• Inquire about the mentoring dentist’s clinical philosophy. Will you be expected to follow his or her guidelines fully?

In order to find a good fit, open communication is essential. After covering your key areas, the mentoring dentist should also clearly communicate his or her expectations. Such as production goals, required schedule, transition plans, compensation, as well as the role you are expected to play in relation to the staff. Again, these are only a few examples; you should seek as much clarification as you need to confidently make a decision.

Begin Your Journey with an End Goal in Mind

Do you plan to own your own practice someday? Speak with your potential employer about the possibility of buying into or purchasing the practice in the future. Negotiate a guaranteed salary when you begin work at the practice.  After nine months discuss basing your salary on the amount of business you bring to the practice.

Take Time to Consider Location

Pay attention to the location of the practice in which you are considering for your associateship. Ultimately, of you plan on owning the practice, its location will determine your future patient base, and how your revenue stream will look.

Develop Your Team

Begin relationships with bankers, CPAS, investment broker, attorney, and insurance agent as well as dental brokers. It’s never too early to establish a strategy with a team of advisors that can help you elevate to the next stage of your career. Also, building relationships with other employed team members can be beneficial later on in your career.

Have a Plan

The key to successfully transitioning out of dental school is to have clear vision of the direction in which you want your career to go. With any professional journey, obstacles are inevitable. By having clear goals and a long term plan in place, you will remain on track for a successful future.

For more information, contact our office at 844-DENT CPA (336-8272) or info@dentalcpas.com 

Note: The content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.